We saw the encouraging 50% or so rises between March and the end of last year. We know stockmarkets still have further to climb before they pass their previous highs, and so there is further prof
We saw the encouraging 50% or so rises between March and the end of last year. We know stockmarkets still have further to climb before they pass their previous highs, and so there is further profit to be made. When market pundits gave their predictions for equities in 2010 they were overall encouraging. The global economy is now in recovery phase. Interest rates are expected to remain low for sometime, which is good news for equities.
On the other hand, as we saw recently when US President Barack Obama unexpectedly announced that he wanted to legislate to change the way banks are allowed to trade, markets can be still be spooked. Here in Europe the UK economic recovery is tentative and individual European countries like Greece, Portugal and Spain are causing concerns for the Eurozone as a whole. And of course you always get some doomsayers with their various warnings.
However, unless you are a short-term investor or someone who ?trades? rather than invests, i.e. who tries to time the market, what happens over the next few months is not really that important in the larger picture. If you are invested for the longer term you will ride out any short-term volatility.
And also, while it is true that the economic picture could be rosier than it is, let?s not forget that it is much better than it was last March, and the doom and gloom at the time didn?t stop markets surging upwards.
Markets can be unpredictable, and as such trying to time them can be a fool?s game.
Waiting to invest
There are many people who are still sitting in cash. Even though they?re frustrated at how little interest they are earning and how long it will take before interest rates offer any significant improvement, they are still waiting to see what will happen next before committing their money to the stockmarkets.
Although I understand their uncertainty, they cannot watch and wait forever. It is a good idea to do your homework and not make rash decisions, but at some point you have to take a decision and make the investment. If you wait too long you stand a good chance of missing the opportunity you were attracted to in the first place.
I?ve met various people who told me that back in February/early March last year common sense told them that share prices should not get much lower and therefore it was a good time to invest as they would be positioned to reap the rewards of the whole bull market ? but yet doubts got in the way and they kept hesitating. They finally invested in the summer or the autumn, and while they are still making a profit it will not be as much as it could have been.
If your investment aim is to protect the long-term value of your capital from inflation, you need to invest for the long term. There is therefore no ?perfect time? to make the investment and any short-term volatility as we move through the economic recovery phase should not have a significant impact on your long-term wealth. If you are still too cautious to invest all your money now, you could take the Pound Cost Averaging approach where you drip feed money into the markets, thus lowering risk.
Trying to time the market
The theory is simple ? buy low, sell high. But if it was that easy everyone would be doing it and making a fortune? and they?re not. To be successful at timing the market you have to get it right twice ? you need to pick both the best time to buy and the best time to sell. Getting it right twice has proven near impossible and it cannot be done with any consistency.
Market movements can at times be irrational. And some events that trigger the markets cannot be predicted, whether it?s something like Obama?s unexpected attack on the banks or an event like September 11th. There is no crystal ball that tells us when to buy and sell, and jumping in and out of the markets can do more harm than good. Markets often provide their biggest returns when least expected, and if you are not invested at the time you miss out on some of the returns.
While traders aim to make money by watching companies and buying their shares at the most opportune time, many people invest through buying funds. Even then there is temptation to time the market, in this case often in an attempt to avoid downturns. They are either fearful that a market fall is the start of a bear market, or else they think they can sell just as markets start to fall and then buy again just as they start to pick up.
It is a normal to have corrections in a bull market. While this can be a fall of 10% or more, and can last from a couple of weeks to a couple of months, it does not usually spell the start of a bear market and does not disrupt the overall upward trend.
You may mistake what turns out to be just a couple of days of falls for a larger correction, and so find you sold completely unnecessarily. And if it does turn out to be a longer correction, you then need to worry about when to get back in. If you sold because you are cautious, then you are likely to also be cautious about getting back in and are likely to leave it too late and could end up with less money than if you had remained invested.
Most importantly, remember that your investment decisions should be based on your investment objectives, and different approaches are recommended for different situations. An experienced wealth manager like Blevins Franks will advise on the best strategy for you, including how to lower risk through diversification and at the same time will ensure that your investment arrangements are tax efficient for your country of residence.
By Bill Blevins, Managing Director, Blevins Franks
4th February 2010
