Timing The Market in Anticipation of Troubled Times

IS NOW A GOOD TIME? IS IT EVER?
If you read the occasional newspaper, watch the occasional television program, or chat with the occasional friend/colleague, you’ll have gained the impression recently that a stock market “correction” is not only likely, it’s inevitable. And “correction” means “downwards”, of course. Let’s look at the evidence, and consider what (if anything) can and should be done.

So, the evidence on both sides needs to be weighed, and you, as investor, need to come to your own conclusion. What is clear though, is that the timing of any upcoming crash is not at all clear.

I’VE DECIDED THAT THE SKY IS FALLING, SO WHAT CAN I DO?
So, let’s say that you’ve decided that global stock markets are indeed due a significant downward correction, “sometime” in the next 6 months. What can and should you do?

The simple solution would be to sell at what you know to be the “high”, ride out the uncertainty, and buy back at the deepest trough of the market “low”; ideally at the exact point that the markets start to recover.

Unfortunately, all empirical retrospective studies of the ability of investors to time the market in this way show that they are never successful with this simple-sounding strategy. There are two main reasons for this:

– Inability to know the future. It’s easy to be wise in retrospect and to identify the turning points in the market. It’s impossible at the time.
– Buying and selling in and out of the market incurs transaction charges, which can become significant over time.

I’VE ACCEPTED THAT I CAN’T PREDICT THE FUTURE, SO WHAT CAN I DO?

• Diversify: ensure that your portfolio is “balanced” i.e. that it contains asset types which are negatively-correlated (since, for example, as stocks fall, bonds generally rise).
• Buy and Hold: time and again, the strategy of sticking to a well-diversified portfolio, rather than buying and selling in and out of the market, has been shown to be the best method of ensuring long-term investing success.
• Re-balance regularly: once or twice a year, take some profit off the table by selling a portion of those funds that have gone up, and buying more of those which have gone down. This discipline avoids the usual, self-destructive human behavior of most investors who buy high (on the assumption that the rocket ship will keep rising) and sell low (on the assumption that the world has ended and they need to run for the hills).

It’s a cliché, but it’s worth concluding with the wise words that your investing journey should be a “marathon rather than a series of sprints”. In other (wise) words, attributed to various people and relevant to many situations, not least of which is investing: “Don’t just stand there, do something!”

This article aims to provide information, it does not constitute financial advice, nor should it be relied upon as such. You should speak to a financial advisor regarding your circumstances before making a financial commitment. Global Financial Consultants Pte Ltd is a Licensed Financial Advisor and is regulated by the Monetary Authority of Singapore. MAS License number FA100035-3