Confused about market timing? These 8 tips may just help…

I have recently encountered a number of instances of clients who are concerned about the timing of new investments.  “Are markets at the top right now and will they soon fall?  What if I lose money right at the beginning? – I would hate that to happen.”.  These are sensible and logical concerns. 

As an adviser and investment manager, I can come across as being a little blasé about market timing, since I accepted many years ago that it is beyond anyone’s control.  Indeed, most efforts to timing right for an investment fail and it is important to understand the reasons why.  I have set out 8 tips to help if you find yourself teetering on the brink of a new investment and worry whether you are about to get the timing wrong.

1. It is impossible to see into the future

This sounds like stating the obvious, but it is true.  Even investment fund managers with great track records cannot see into the future, despite what their marketing departments might say about their talents.   Even those who exude confidence with eloquent explanations of market events over the last 50 years cannot predict the future.  So don’t hang your hat on any such predictions.  The best investment managers are often humble and achieve returns by managing risks and diversifying, rather than making bold predictions.

2. When you invest you can’t see the bottom or the top

It is amazing how easy it is to identify historic peaks and troughs when looking at a line chart of stock market movements over the last 30 years.  Exactly where they will go next is not possible to derive from a simple extrapolation or by observing a repeating pattern.  It is seriously not that easy!  The same goes for those waiting to pile into investments at the bottom, you will only know if you got it right with hindsight.  Are markets at the top right now, in 2017?  All I can say is that I might be able to tell you ten years from now.  I sincerely hope that they are not, and that in July 2027 we will be staring back at market figures in 2017 from a new dizzy height.  

3.  There is no top – period!

Stock market indices are simply numbers.  They don’t sit under a ceiling.  They can go as high as they like, maximums don’t apply.  All we can say for sure is that they will break through previous highs at some point – just predicting exactly when is the impossible part.  Amazingly, the FTSE 100 was launched in 1984 with a starting value of 1,000.  It is now over 7,000.  Numerate readers will note that to get to 7,000 it had to pass through key barriers, such as 2,000 and then 3,000 and so on.  New businesses turn up, new products are launched, some companies fail but most continue, and the business of business carries on growing.

4.  What about Gravity?

What goes up must come down?  Tell that to the FTSE 100…..  It might bounce around, but not in a predictable fashion, unlike a bouncy ball in a playground.  The laws of gravity don’t apply.  There is a certain accepted wisdom that markets will fall at some point – we see it happen often enough – but again, it is impossible to predict with accuracy exactly how much and when. People invented stock markets and how the indices are calculated, but gravity was there long before we were.  Nature and physics have nothing to do with stock markets (OK, unless natural disasters strike….which are incidentally also very hard to predict). 

5.  May the Odds Ever be in Your Favour

Easy to say because it is true.  Investment market returns are skewed towards the positive.  The ups far outweigh the downs.  It is not gambling, it is participating in the value generated through commerce, the only bet is on capitalism, if you like.  Just make sure you have a well-diversified portfolio.  If you choose only a small number of companies then perhaps it is more like gambling……

5.  But I am sure some people predicted the Credit Crunch?

In a crowded market place where there are many predictions, a small number are statistically bound to be right.  Those who are right a lauded with praise (soak it up!) until their next prediction turns out to be wrong.  Besides, if they called the Credit Crunch correctly, how correct were they?  Did they state the extent of the fall and did they correctly pick out the timing of the recovery too?  There are many, many one-hit-wonders in the prediction world, and no reliable chart toppers.  

6.  What about all the bad news we keep hearing?

Don’t worry, I won’t use the word f*** (“fake” for the censors).  We are a species of worriers generally, and for this reason bad news sells.  We do see the odd headline about highest ever dividends or profits, but on the whole the headlines use words like “jitters”, “concerns”, “worries” or “spooked”.  They are also generally linked to specific issues like single political events, interest rates or inflation.  The investment world is far more complicated than a brief newspaper article.  There are always many factors at work, not just one or two.  Such headlines make for good reading, and they are informative, but they are poor predictors of market movements. 

6.  So market timing makes no difference then?

I didn’t say that.  Of course, each individual investor can have a different experience depending on the day they invest, when they review the performance and when they ultimately cash-out.  We see plenty of couples where one partner has a slightly different ISA return to the other, despite having sent off the cheques at the same time.  This can happen if the investment deals were placed just one day apart – yes, a day can make a difference!  Timing will affect the returns, you just can’t predict how in advance.

7.  I’m confused, you say it doesn’t matter and then say it does?  What do I do?

The secret to successful investing is in the planning.  Keep a good level of cash reserves, so you are not forced to sell when markets are down, allowing you to ride-out the tough times.  Consider the potential downside of the investments and make sure that you can stomach them.  And give yourself plenty of time, because that is the secret ingredient in all well-diversified investment portfolios.  The longer you leave your money to grow the greater the chance of the odds working out in your favour (we would normally suggest a bare minimum of 5-7 years).  It’s all about time, not timing. 

8.  If you need help….

Luckily, advice on these issues is exactly what we do.  Please do speak to your adviser at Alexander Beard.

Your capital is at risk, values can fall as well as rise.