As global financial markets continue to be volatile, some investors either wait to invest or sell all their holdings to get out of the market. Either of these decisions is made with the expectation that the market will continue to go down or the desire to wait for the market to start going back up. After all, it’s easy to determine when the market will change course and start appreciating again. Often, I will hear something like, “If we get a few good days in a row, then I will re-invest!”
I received a call this week from a new client who was in the process of transferring money to fund his account. He said that he “heard” that markets are going to continue to fall, and he doesn’t want to start investing until he feels comfortable or “hears” that things are better. I mentioned that through luck and timing, he can actually take advantage of the recent market drop and buy his portfolio at a discount. I gave him all the data, and he wasn’t convinced.
Opposite thinking
Unfortunately, some investors have an inverted perception of risk. They tend to buy stocks when they have already been appreciated significantly and sell them after they have already gotten crushed. However, this is the opposite of the golden rule of investing: Buy low and sell high.
Time the market?
One important investment strategy is timing the market, where the investor decides on the best time to either buy or sell her portfolio. Market timers depend heavily on market trends, both historical and current. Portfolio managers and brokers often use market-timing strategies to try and increase gains for their clients and claim that these timing strategies are more successful than other investment methods.
Taken to an extreme, pure timing requires the investor to determine when to move 100% in or 100% out of one of the three asset classes – stocks, bonds, and money markets. Pure timing, which is possibly the riskiest of market timing strategies, also calls for nearly 100% accurate forecasting, and since we are not prophets, this is something nobody can claim.
Don't miss the boat
One of the biggest risks of trying to keep timing the market is the potential of “missing” the market. This occurs when an investor, thinking the market will go down, reallocates his or her investments and places them into more conservative options. While the money is on the sidelines, the market shoots up. This means that the investor has incorrectly timed the market and “missed” the best-performing months. Numerous studies have been done to illustrate how much an investor can lose by being out of the market.
According to Fidelity, had you invested $10,000 on January 1, 1988, and stayed in the market through December 31, 2023, you would have $417,995. Had you missed the five best-performing market days during that time period, you would have a value of $264,006, which is 37% less! Miss the 10 best-performing days, and you will have over 54% less.
Is now the time for optimism?
With the market continuing to drop, we may ask whether or not it is a good time to buy right now. Investors who go against the general market trend are called “contrarians.” A contrarian is also defined as an individual who believes that certain crowd behavior among investors can lead to exploitable mis-pricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks and selling them after the company recovers can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops when those high expectations don’t pan out. Avoiding investments in over-hyped investments reduces the risk of such drops.
While constantly buying and selling and trying to time the market are not always advisable, it is worthwhile to remember that there are always opportunities in the market, especially after it has dropped. When potential investments are analyzed objectively, without getting caught up in the pessimism that pervades the current investing climate, this could mean that now may be a good time to invest.
It’s important to keep emotions out of it and turn off the news. It’s important to note that past performance does not indicate future returns. While historical data may be a lot more boring than gloom and doom predictions, statistically, it probably pays to stick to the data and not try and time the market.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill) and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com, or email aaron@lighthousecapital.co.il.
