April 11, 2019

Investing takes time, not timing

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It’s amazing. Some years ago it was considered normal if you talked at dinner parties or in the pub about what you invested in and the outcome. With the Celtic Tiger bust, this had become a topic that was taboo. Nevertheless, with stockmarkets hitting all time highs the discussion of wealth has hit centre stage again not only in Ireland but also globally. What these instances often mis-diagnose is that Investing takes time.

International Stock Markets

Another interesting issue is the fact that any investor who adopted a buy and hold strategy in most low-cost index funds of a developed market has not lost money. This is a little odd when you consider that we have had the tech bubble in the early noughties. This was followed by the 9/11 market reaction and then in recent years the global financial crisis.

What do the stats say?

Ironically, while the statistics show the academic scores in a good light very few investors have seen the real growth. This is because most adopted a sell and buyback in the light of market volatility in recent years. US analytics firm Dalbar continues to gather data on how collective funds and individual investors performed over the intervening period. Irrespective of asset class of either bonds or equities, personal investors lost 5% p.a. against index funds that had an implicit buy and hold philosophy. This strategy is nothing fancy as index funds move up and down with the underling markets they track. As long as entry and annual costs are kept low, investors have a far better chance of quickly making up the relative investment costs.

The Long-term solution?

All that is needed is for investors to be long term holders of investment positions. But generally they’re not. Unlike an index that is blind to emotions, most investors do not have the patience or the nerve to hold their market position. Greed or fear drives them to sell out at low prices and buy back in at a higher price. Sometimes this happens because investors are overconfident. Sometimes it is because they are genuinely afraid that their life savings will be decimated.

Market Returns versus Investor Returns

This difference between returns generated by the markets and returns effectively generated by investors themselves is well known and is referred to as the “Behaviour Gap”. Apart from Dalbar, leading financial academics have been writing papers on the subject for decades. One such academic Meir Statman of Santa Clara University in California estimated that 93.6% of investment return, for good or bad, was down to the behavioural decisions of the investor. When an investor decided to stay with the markets, through good times and otherwise, they reaped the rewards. If they decided to exit, they lost out mainly because they made poor judgements about when they got out and then came back in again. Again, Investing takes time, not timing.

Investment Media Chatter

Most investors are unaware of the cyclical nature of markets. This is despite the proliferation of information through news channels, the internet and the printed media.  But being part of a roller coaster is no fun if you feel like getting sick on every steep decline. You could be on the real thing or just watching your investment values gyrate. Rebalancing of returns, over time, is a necessary element of investor strategy. Otherwise, short term returns might get wiped out by short term losses.

Even allowing for major geopolitical events, a separate yet serious market fall happens once every 10 years. When it happens it can be savage. While nobody has the lifespan to oversee a period of 80 years financial history has shown that market volatility is not a recent contagion. Nonetheless, volatility is part and parcel of the investment gain. It draws investors in and for those unsure of themselves it spits them out.

The role of Emotion in Investing

For those who decide to stay on the ride and in control of their emotions, it brings eventual gains, in some cases these gains are very substantial. Warren Buffet says it best “Be fearful when others are greedy and greedy when others are fearful”. And he should know as he has been around longer than most. The Russian novelist Tolstoy was more gentle when he expressed “The two most powerful warriors are patience and time.” Good investing takes time. Call us today and we will give you the time you need to make good investment choices.

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