The Question of Timing
Monday, January 18, 2010
One of the most common questions about investing is "when is a good time to invest?". Of course as we know, markets go up over the long term, and the major risk in being out of the market is missing those gains (which sometimes come unexpectedly). Given the market's strong psychological component, investors trying to time the market usually get it wrong and thus should stick to buy and hold. (see chart).
Long term chart of S&P 500 Index (charted relative to percentage return rather than index level)
Of course there is a huge benefit to trying to time the market as we saw at the top of both cycles this decade; however, the question of when to get out is not the problem, it is that once you're out, when do you get back in? Once you go down that road, tough decisions ensue. Thus, the adage, get in and stay in.
Of course, there have been periods in the market's history which have shown flat returns, where the market fluctuates between undervalued and fairly valued (Japan in the 90's, 1970's). For the average investor, sticking it out may be painful, but with patience there eventually is a bull market around the corner.
From our perspective, if one is able to determine what kind of market we are in (i.e. bull, range bound, bear); there are huge benefits to managing the asset allocation internally from conservative to modestly aggressive levels of investment. We call this market pricing rather than market timing. In a bull market, prices stay overvalued for a long time. In a bear market the reverse. However, in a range bound flat market, the market fluctuates between undervalued and fairly to overvalued. What type of market will the future hold? Stay tuned, but be aware that most index funds are being driven blind and even though they may weather the storms (you may get a bit seasick though); they may not be the best investment vehicle in today's environment relative to an active fund.
At Van Arbor we prefer not to get seasick, and have been good at avoiding the big storms. On the other hand, we also find those clear patches of sky fairly well; hence we are in a position to actively manage the funds in terms of level of investment and sector preference.
This leaves the tough decisions about capital preservation and appreciation to Van Arbor, and lets the client just kick up their feet and enjoy the ride!