The current challenge is to manage the investor rather than how to manage the investment.
Every investor wants to buy at the bottom of the market and sell at the top. Essentially, investors expect their advisors to be able to time the market—knowing just when they should invest and when they should sell.
In order to successfully time the market, one would need to understand and predict several variables as diverse as interest rates, consumer confidence, company fundamentals, commodities prices, bond yields, and even the weather. Not surprisingly, even top professionals cannot get it right all of the time. For individual investors to get it right with less access to information is even less likely.
Greed and fear are often the driving emotions behind a belief that markets can be timed, and unfortunately, these emotions often result in investors getting it horribly wrong.
Robert Jacobs, Business Development Manager at Barclays Private Clients, says: “The problem is that psychologically it’s easier to invest at the top of the bubble—after several years of comforting gains—than it is to invest near the subsequent low point, when the news inevitably looks bleak—even though it’s clearly better to buy near the bottom of the market than at the top.”
Statistics indicate that the majority of fatal car accidents occur within a 3km radius of the victim’s home. Investment statistics are equally interesting, in that most disasters occur among investors who are in an investment vehicle for the short term. This is largely due to impatience and unrealistic short-term expectations. Greed and fear often drive the belief that markets can be timed, but this approach usually leads to failure.
Most clients who invested in equity markets over the past three years are now becoming impatient and asking their financial advisors to sell. Advisors need to help investors regain rationality by bringing them back to their original objectives and helping them avoid buying high and selling low.
The rebounds that follow prolonged bear markets have, in the past, tended to be both strong and rapid. Historically, markets have risen much more often than they have fallen. As Peter Lynch of Fidelity Management and Research says: “I’ve no idea whether the next 1,000 points for the Dow or Nasdaq will be in positive or negative territory. But I would argue that the next 5,000 points for each will be up—as will the next 10,000.” This suggests that it’s more important to be in the market than to time it correctly.
Tri-Alpha Asset Management advocates that volatility is not an evil to be avoided at all costs, but rather a reality that needs to be managed. Though market exposure poses a greater risk, it rewards investors with superior returns over time.
Ironically, many financial advisers are themselves unconvinced that stock markets are the best investments for the long term. Investment flows into unit trusts (monthly and lump sum) would indicate that advice is being directed towards property and income funds in preference to equities. It’s tempting to wait for further falls before buying. However, the only way to be sure that the market has bottomed is to wait until news has improved beyond any doubt. By then, much of the upside may have already occurred.
So, the question investors should ask themselves is: “Are markets likely to be higher than this by the end of my investment period?” If the answer is “Yes,” now should be a good time to invest.
