There is No Crystal Ball

Here’s a true story. It illustrates the fallacy of market timing.

Once upon a time a man wanted to plan for his retirement so he approached a financial broker to advise him on his retirement planning. The man was a long long way from retirement (decades) and his risk assessment indicated that he had an appetite for risk but the broker was a believer in market timing and because the market had been increasing in value for six years and he had concerns around US government debt and other geopolitical events, he advised him that he should move his existing pension assets to a product under his control and invest it in low risk assets. The funds he invested in would only target to make around 3% p.a. so it was unlikely that his pension was going to grow in value after the management charge and inflation were factored in, but his money would be safe. The plan was that when the big correction came he would switch over to riskier assets and make a killing.

Wind the clock on four years and the client is getting apprehensive. The market is powering on (sure, there have been short bouts of volatility) but his pension is going nowhere. He has a choice to make. He wants to switch to higher risk funds more suitable to his assessed risk rating, but he is concerned that if he does this, not only will he have lost out on the gains in the intervening four years, he may also take a huge hit if the correction arrives shortly afterwards. A double whammy.

Trying to time the market has put him in an impossible situation. If he sits tight and the bull run continues, he loses. If he changes his strategy and the market changes he loses massively. He thinks about what got him into this mess and he decides to sit tight. He decides that he should have listened to the investment professionals who say that ‘time in the market’ not ‘timing the market’ is the correct strategy. Another thing that those professionals say is that if you have a strategy, you should stick to it; if the market hasn’t changed and your situation hasn’t changed, don’t let fear or emotion take over.

Having made one mistake he decides not to make another. He leaves his pension alone. The correction arrives in early 2020, five years after his adviser said it would. His adviser wasn’t wrong, he was early (very early, which in the investment world is the same as being wrong). Markets go into a spin. He knows from experience that just like his adviser couldn’t time the top of the market, he can’t time the bottom either, so he doesn’t try to. He does nothing. He eventually gets back in to the market at a point which means that he hasn’t lost out, but he has gained nothing in the five years that his pension was invested, despite markets having risen by 50% during the period. Market timing is a fallacy. Nobody rings a bell at the top of the market or at the bottom. Stories abound of investors who transferred out to Cash around the time of spike in volatility and missed the bulk of the rebound. Not only can your adviser not time the market, it is not even his job to time the market. Your advisers job is to guide you in how you can plan to achieve your financial objectives, how you can use the returns available from a diversified portfolio of equities and other asset classes, in conjunction with your appetite for, tolerance of, and capacity for risk, to reduce the cost of fulfilling your objectives, so you can do more, with less. Once the plan is implemented his job is to review it annually, manage risk (especially important when approaching and during your retirement), and prevent you from making knee jerk mistakes based on short term volatility.

Short term market volatility is just noise. If you are invested for the long term when you look at the market you should be thinking about price. The price of investing has reduced in recent weeks. Nobody knew when this was going to happen but now that it has happened it means that, if you have the capacity to do so, the coming months are an even better time to invest. It is only when you mature your investment that it is about value.

There is no crystal ball.

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© Highfield Financial Planning 31 March 2020 at 17.15 hrs.

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