It’s not timing the market but time in the market
by Peter Switzer
The goal I set myself when I put my fingers to the keyboard is to tell my readers something they don’t know. I always hope that it will help them ‘wisen’ up — money-wise or business-wise. And you would love to think that your current column is always your best but I don’t know if I could ever top the one I wrote for my Yahoo column on 19 March this year.
That said, I hope this one will still be my best.
The column began with: “Sure we live in interesting times and you could call them scary times but many of you might have heard some pundits say ‘this is the buying opportunity of a lifetime’. And despite the very mad, bad and dangerous economic times we live in right now, these smart guys are right.”
I did it! I actually put into writing my call that it was time to buy shares again. I thought I had but as I write a lot and comment a lot on radio and TV, I was not sure if I had got it in writing.
History and research is key
Of course, being a critic, I actually gave myself a gentle uppercut for being a week late but it still remained a pretty cool call, as my younger commentator colleagues might say.
This is what I noted at the time: “You could have been better off buying last week before the All Ords went up nine per cent but timing is always really hard.”
Since then, the stock market has gone up over 40 per cent, which makes this a great call but it does not mean that I am a market guru. It means I have used the history of markets and the best of financial planning guidance to put investors in the position to cash in on a good market opportunity.
The column pointed to great research that made it pretty safe to suggest that history will repeat itself, in some shape or form, and that investing in good quality companies will pay off.
Once again, let me go back to show you what I wrote as it’s a great money making lesson.
“Get one thing straight, when it comes to investment ideas there are always risks but history can give you some pretty good investment strategies. The team at Vanguard shows a fairly sound investment strategy in a graph that looks at what happens to $10,000 between 1978 and 2007. It makes profitable reading.
“It shows that $10,000 invested in the stock market in 1978 in something like an index fund that reasonably represents what happens with the All Ords, with dividends included, ended up growing to $589,794! That was a return of 14.7 per cent per annum. This included recessions and crashes in 1981, 1987, 1990 and the tech wreck of 2002.”
And then I came up with a ripper line: “Of course, a lot of this has been lost in the most recent crash but over time the good years will outweigh the bad years, and the amount will grow again.”
The importance of time
The lesson, and it’s one that has stood the test of time, is that it’s not timing the market but time in the market.
Let me say, I am not a total devotee to this rule of thumb for everyone as it would have been great to sell out of your shares in October 2007 and then to be a buyer in March 2009 but that’s more easily said or written than done.
Timing the market is always a gamble and that’s why professional advisers generally avoid it.
In it for the long-term
Back to that column and this is what I advised:
“If you have not been in the market before, you should have at least a 10-year time period and as a long-term investor you could see this as a buying opportunity. Possibly this could be a 1978 investment starting point waiting to happen but notice that I said: ‘could’.”
If you look closely at what I use to make my judgement calls, you will see it’s history and time-tested rules that have a solid record for being right. I cannot control the events of the world that speed up or delay economic and market solutions or vice versa. but by taking a long-run point of view I can give myself a good chance of being right, most of the time.
My biggest gamble with the ‘best column’ was that I used my economist training to support what I thought were reasonable government and central bank responses to the threats that came after the collapse of Lehman Brothers.
This gamble remains as we are not totally out of the woods for the global economy and financial markets. And I do not think we will see another 50 per cent rise on the stock market next year, but I think it will be up and returning better than a fixed deposit interest rate at a safe bank.
The 19 March column ended with: “The time is right for investing but is the time right for you?”
This one will end with — the time is right for investing if you buy quality shares that pay good dividends and you are a long-term investor.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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Published on: Friday, October 30, 2009blog comments powered by Disqus