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‘Timing the market is a mug’s game’

Historic Alsi movements demonstrate just how difficult it can be.

JOHANNESBURG – When markets are temperamental, it is often incredibly tempting to get in or out in anticipation of significant jumps or drops.

Even after markets start falling investors may still sell their stocks in an effort to limit losses.

Investors tend to suffer a loss a lot more than an equal gain, says Gareth Johnson, head of retail business at Investment Solutions.

In behavioural finance, this is referred to as loss aversion. For example, if an investor withdrew money from an ATM and R200 went missing, it would be much more frustrating than if the same investor found R200 lying on the floor, he says.

Unfortunately, this tendency often has a detrimental effect on investment decisions.

In numbers

The chart below shows how R100 invested in the FTSE/JSE All Share Index (Alsi) would have grown had it been invested over the roughly 20 years from June 1, 1995 to October 31, 2014. The numbers do not include potential fees involved in getting in and out of the market.

Screen Shot 2015-07-31 at 11.36.50 AM

Source: I-Net Bridge and Investment Solutions

Had the investor been fully invested over the period, R100 would have grown to
R1 760, Johnson says.

However, if the investor missed the ten best days in the stock market, the growth would have been much less and the money accumulated would only amount to R965. If the investor missed the 60 best trading days on the Alsi, returns would have been dismal and he would only have R143.

But what would happen if investors missed the worst days in the market?

This is illustrated in the chart below.

Screen Shot 2015-07-31 at 11.37.10 AM

Source: I-Net Bridge and Investment Solutions

Again, if the investor stayed fully invested over the twenty years, R100 would have grown to R1 760.

However, if the investor missed the ten worst days in the stock market over the period, the investor would have had R3 697 at the end of the period. If he managed to sidestep the 60 worst trading days, he would have R26 899 after 20 years.

Against this background, a lot of investors would argue that their financial advisors or asset managers should just make sure they avoid the worst days in the market, Johnson says.

But this is much easier said than done. Even if a financial advisor or asset manager could get it right on one or two occasions the probability of continuous accurate future market predictions is negligible.

The graph below shows the dates and total return of the Alsi on the 15 best and worst trading days during the 20-year period in question. The colours are indicative of good and bad days experienced during the same month.

Screen Shot 2015-07-31 at 11.37.40 AM

Source: I-Net Bridge and Investment Solutions

In some instances huge gains and losses even occurred during the same trading week.

On October 27, 1997 the Alsi dropped by 6.2%. One day later it fell another 11.9%, only to gain 7.7% on October 29. Two days later (October 31, 1997) the Alsi surged another 5%.

Trying to time the market is a mug’s game, Johnson says.

A much better strategy is for the investor to spread his risk by being fully invested in the market (depending on his time horizon), Johnson says.

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Agreed. Trying to time the market is a losing game. It’s a pity that active managers employ this strategy even though research has shown it fails far more than succeeds. Too often we hear fund managers giving their opinions on how cheap or expensive the market is and how they have positioned their portfolios accordingly. Investors beware when you hear this strategy.

Still you have to have the right shares to begin with if you want to hold them for long. Holding a share on a downtrend for long will only make it worse. Rather check for shares on for instance that is on an uptrend.

End of comments.





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