Given the choice, who wouldn’t want to be able to ‘time the market’ successfully and consistently?
Imagine, year after year, being able to forecast the most appropriate times to sell as share markets became too hot for comfort and then being in the enviable position of correctly forecasting the most opportune time to buy once again.
Dale Gillham’s “It is all in the timing” (MM, January 22, 2009, p13) gives us hope.
Assume that the general perception of ‘market timing’ is a strategy in which growth assets, such as shares and property, are sold and the proceeds directed into the defensive assets of cash and fixed interest when the share market is falling (bear market) or forecast to fall, and then switched back into shares when share markets are rising (bull markets) or forecast to rise.
However, the ‘time in the market’ or ‘buy and hold’ strategy is not a simple black-and-white matter in which shares are bought and held forever.
There are shades of grey, as buying and selling of stocks does still occur in a time in the market strategy.
The buy and hold description refers to the long-term strategy of maintaining a determined asset allocation to achieve an outcome.
While financial planners help to determine an investor’s long-term goals, strategy, and asset allocation required to meet agreed objectives, it is fund managers (if investing via managed funds) who decide which stocks are bought or sold within a fund.
So, even with a buy and hold strategy, stocks are bought and sold from time to time.
Those who construct share portfolios for investors, or individuals who manage their own share portfolios, are in essence fund managers.
On the surface, buying low and selling high seems like a logical and commonsense thing to do, even if one accepts that it is impossible to pick either the exact top or bottom of the market on a consistent basis.
In today’s world of electronic communications, with the aid of wrap accounts and administration platforms, such timing manoeuvres can be executed quickly, and efficiently.
So what should investors do? After all, if timing the market truly is a smarter way of investing, shouldn’t everyone be doing it?
Well known investors Benjamin Graham, John Templeton, Peter Lynch, Charles D Ellis and Warren Buffet have much to say on the subject.
All agree that time in the market is much more important than timing the market.
There are many long-term studies available to substantiate such views.
In his book The Intelligent Investor, Benjamin Graham questioned whether or not anything could be accomplished by trying to time the market.
He also said that: “Our time in the market is more important than timing the market.”
However, he went on to say, that timing combined with pricing can bring about satisfactory results for the intelligent investor, if stocks are bought below their fair value and sold when they rise above such value, and: “We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results.”
Graham also stated: “The investor should never buy a stock because it has gone up or sell one because it has gone down.”
Bearing this in mind, it seems unlikely that Graham would entertain ‘stop-loss’ strategies or Dale Gillham’s rule of thumb that once a stock has fallen by 15 per cent it should be sold to protect capital (Financial Planning, p42, August 2008).
Graham, Buffet, Ellis, Lynch and Templeton all agree that no one can successfully and consistently forecast the share market in the short term.
Dale Gillham’s forecast that he expected “the All Ordinaries to be trading around 6,000 points by the end of this year (2008), with it likely to peak between March and May 2009” is further proof of this (Financial Planning, p42, August 2008).
At the end of March this year, the All Ordinaries was hovering around 3,500 points.
Finding similar information about successful long-term market timing and credible studies was difficult.
I Googled ‘successful market timing strategies’ and was bombarded with myriad investor blogs, each and every one claiming expert status in the art of timing the market, with promises to help me do the same. All I had to do was “invest” in their “new” system and purchase a software package that would help me “time” my way to success in the share market.
Writer Jason Zweig took Danish philosopher Soren Kierkegaard’s observations that, “life can only be understood backwards, but it must be lived forwards” one step further by saying: “Looking back, you can always see exactly when you should have bought and sold your stocks. But don’t let that fool you into thinking you can see, in real time, just when to get in and out. In the financial markets, hindsight is forever 20-20 but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.”
Unfortunately, those investors who crave investment action, magic and excitement (over the slow, deliberate, boring plan of sticking to an asset allocation strategy and periodically rebalance their portfolios, which forces them to sell high and buy low anyway), will forever be their own worst enemy.
Patience and self-discipline are two essential attributes for success in the long-term investment game.
In fact, I couldn’t agree more with Dale Gillham’s recommendation (The Australian Financial Review, March 5, 2009, Online Trading, p15) that: “The story of the tortoise and the hare is something everyone should read because it is so apt to the share market — the tortoise always wins.”
Sounds a bit like a ‘time in the market’ strategy to me. Now that has to be an intelligent investor.
Michael Dale is a financial adviser and representative at Fiducian Financial Services.
