Market Timing – The Myth
Sell right at the peak before the equity market crash and with your wealth intact, go on a holiday. Hopefully, when you come back, calm will have somewhat returned to the markets. You deploy your cash just at the right time to catch the rebound. Now, that’s buying low and selling high; and market timing at its finest.
Sure, timing the market may sound easy and highly rewarding when you get it right – or if you do get it right. Even for the professionals though, that may be easier said than done. Here are the 2 most ideal and desired scenarios by market timers, examined in greater detail and what could burst their bubble. The fallacies explained 1.Attempting to predict market top:
As the stock market rally stretches on, some investors will undoubtedly get nervy. Whether it has been a month, a year, or even a 10 year bull run, they will begin to question the sustainability of the rally.
A better option may be to evaluate the global growth outlook, price earning multiple, corporate earnings trend or other macro data. Analyse the numbers and the cold, hard facts.
Regrettably, most investors base their decisions on pure instinct or hear- say. Once he starts converting the majority of his wealth into cash, Mr. Bear will be waiting for the ‘buy signal’, in other words, market crash to come. Only time will tell if he is proven right. However, even professionals don’t have a crystal ball to predict when and where the crisis will come.
If the market does not crash as he predicted but instead prices just keep creeping up higher, how long more do you think the investor can continue holding on to cash, which yields next to nothing and keep waiting? When he eventually gives in, he will be forced to buy at an even higher price.
What an irony if it so happens that the market has really reached its peak. 2.Buying when market starts coming down
Having that thought is a good start, after all like the legendary investor, Sir John Templeton once said, “Buy when there is blood on the streets”. But then again, how many can actually walk the talk.
In times of market downturns, the majority will succumb to the initial panic selling. The few that manages to buy into the initial selloff may not have the stomach to follow through the strategy all the way. It is not unusual for prices to come down lower even after a steep drop in prices. That will shake the confidence of the strongest investor.
At the height of the selling, no one truly knows where the bottom is. Only a brave few will stick to their guns and continue accumulating near market bottoms.
By the time a more convincing story has been pieced together, the market will already have rallied. The stock market is a forwardlooking animal, so whatever sentiments you are feeling on the ground, right now, will already have been priced in much earlier by market participants.
Conclusion
By making emotional decisions, market timers inadvertently turn the famous investing adage of buying low and selling high, upside down.
They sell at times of greatest panic and potentially miss out on subsequent gains.
If you do feel equity valuations are high, consider taking some profit and maybe raise 10- 20 per cent in cash. That way, if the market really comes down, you can re- deploy your reserve cash in several stages to catch the market at its lower levels. However if the market goes up instead, you still have 80 per cent invested to catch the rally. Try to avoid from making drastic moves to your overall portfolio. Keeping 100 per cent cash for instance, is a gamble. What if the market goes the opposite way?
Areca Capital is a niche Malaysian fund management company. For any enquiries, they can be contacted at 03- 79563111 or invest@ arecacapital.com.
Disclaimer: The article is produced based on material and information compiled from reliable sources at the time of writing. The article is not an offer, recommendation or advice to transact in any investment products, including the stocks or funds mentioned within. Investors are advised to consult professional investment advisers before making any investment decision.