John Authers' Long View article in the FT this weekend addresses market timing. While he claims that just passive investors are such bad timers, I would go further: most are.
Attempts to time the market (choosing the right moment to buy or sell into risk assets) are a mug's game. Great for brokerages that delight in investors' fees levied to senselessly overtrade. Bad for investor's portfolio outcomes. Despite the annual survey by Dalbar that investors' attempts to time the market is really bad for their portfolio, people - including some portfolio managers - still try and have a go.
The problem is that in timing the market, we become slaves to our behavioural biases around entry points, and the noise around market sentiment. An investor fearing Brexit might have - out of emotion - sold everything to cash stocked up on gold sovereigns and run for the hills whilst tracing Irish ancestry. The smart thing was to acknowledge sterling weakness and increase their allocation to FTSE100 exposure where companies have predominantly foreign earnings.
So what do you do if you don't want to time? The answer's simple: have a rule. If you're moving from holding one portfolio of risk assets to another (e.g. switching managers). There's no point trying to time - switching on a relevant valuation point (e.g. month or quarter end) keeps you "in the game" and allows you to reset the performance measurement clock.
If you're moving from 100% cash to a 100% non-cash portfolio of equities and bonds, it's slightly different: your entry point has a huge impact on long-term value of your portfolio. In this instance, I would want to "average in", either by allocating 1/12th of the capital each month into the proposed portfolio, or a quarter of the capital each quarter. By "averaging" in your entry point is exactly that: an average. But that's better than flipping a coin on the vicissitudes of Mr. Market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk
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