Thursday, June 20, 2019

Common Mistake 1 - Obsessed Over Market-Timing

Many investors believe that timing the market gives better returns and reduces risk. I am afraid that's not the case.
If you are in your thirties, you can expect to live through roughly 10 more bear markets, big and small, at least. Are you really going to freak out, panic and go fully into cash every time? It makes no sense. Market timing doesn't work over the long run. It just... doesn't! Financial advisors and investment managers would try to convince you they don't do market-timing, but they actually do. They 'packaged' their sales pitch in a different way, using fanciful investing jargon such as 'downside protection', 'asset-class rotation', 'tactical allocation', 'style-rotation' and 'sector-rotation'. All these strategies imply that they are able to predict when to move from one part of the market to another, which honestly they don't. Nobody does!

Lots of investors miscalculate/underestimate the risk of bad market timing. They assume that they possess great 'predictive powers' that allow them to sell at the top now and re-enter the market at even lower valuations in the future. Sell high, buy low, right? Safety first, right? Unfortunately, the risk of being out of the market is far greater than the risk of being in.

Alice and Jane received their annual bonuses of $10k each. Alice decided to invest all at once. Jane decided to wait in cash. 3 possible scenarios will always play out.

In the end, over the long run, being on the sidelines often results in permanently missing the upside. For example, REITs have rallied ferociously from their Nov/Dec 2018 lows over the first half of 2019. Yes, their prices might go back down, but will it go back to their previous lows? Maybe not. If prices don't go back down to that level, investors who avoided REITs will never be able to capture that returns again. A potential 10% capital appreciation and a 6% DPU yield in a year is a rather huge opportunity cost. 

The masses get it wrong, the media gets it wrong, the economists get it wrong, investment managers get it wrong and so does just about everyone else. Corrections are going to happen. Bear markets are going to happen. Bad things happen all the time around the world. You will do more harm to your portfolio than good by trying to 'predict' your way through them.

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves....." 
~ Peter Lynch


WTK said...

Hi DW,

The best approach is to buy and forget the dividend counters. The generated dividend will be credited into the bank account when they are due. No further action is required from one.


Witcher Apprentice said...

Hi DW,
I am new to the SG Stock market and is doing research on the SG Reit. I totally agree with what you said. Everyone is talking about Cash is king. But keeping cash has costs too. Inflation is eating the purchasing power of it. Opportunity cost is the possible capital gain and dividend generated.
A good blogger in Hong Kong said Cashflow is king, he valued the reinvesting power and deleveraging power of the cashflow generated by investments. With cashflow, you can calmly survive the bear market and have the ability to buy undervalued but good instruments.
Look forward to more of your sharing. Great place to learn!