Market Timing - Greed and Fear

This is a subject much talked about with the recent falls (June 2006) in the stockmarket (the FTSE 100 Index has fallen 10% in the last few weeks).

It is the belief of some investors that they can time when the market will rise and fall, meaning if they move their investments between the asset classes - equities, bonds, property and cash – at the right time they will make profits.

If only this were so simple…

Many professional investors boast that they can do this, but few succeed in outperforming the market for more than a few years in a row. One of the reasons for this is because of the theory known as ‘market efficiency’ where share prices reflect known information.

With the current pace of technological advances, the theory is that it’s hard for money managers to find new investment opportunities that will not be reflected (almost immediately) in the market.

So, what approach can you take with your investments?

This is where we return to the old adage of 'buy and hold'.

One approach of the buy and hold strategy is to invest in the different asset classes relating to the risk you wish to take (or not to take), and to hold this 'spread'.

As an example of how important this is, if you take the years December 1969 to December 2002 and invested £1, it would be worth £47 by 2002 if remaining fully invested. However, if you missed the best 4 months in this period, this same £1 would be worth £17, a return that would not have even have been as good as cash. (Source Ibbotson Associates 2003. Past performance is not a guide to the future).

The chance of investing at the right time is so small it is simply not worth the risk. Our view is if you constantly wait to invest at the right time, it will never arrive as how will you know when the right time to invest is?

The Key Consideration

Don't be tempted to chase the latest investment fad, or succumb to greed or fear. By taking the time to create an asset class based investment portfolio you won't have to worry about market timing and can instead concentrate on building the value of your investments over the medium to
long term. 

If you're still not convinced and want to invest your money in lump sums when you feel the time is right, why not invest on a monthly basis? This will mean you won't have to worry about timing as you'll be buying units or
shares on a regular basis.