Trying to “time the market”—buying low and selling high—is by common consent impossibleby Andy Davis / June 18, 2015 / Leave a comment
Published in July 2015 issue of Prospect Magazine
Markets at the moment remind me of a machine at the soft play centre that our children love. The youngest is fascinated by this device, which makes brightly coloured plastic balls float before her eyes on jets of air. They totter on the updrafts in a precarious dance but if she stretches out her hand to grab them they fall to the floor. Markets may not be imminently heading in the same direction but things feel precarious. Bonds of all sorts look dangerously expensive: there’s limited room for their prices to go up and plenty of room for them to fall if inflation starts to reappear, and as the long lull in interest rates looks to be nearing an end. Most equity markets do not appear conspicuously good value and in the case of Chinese shares a bubble may well be developing. Like others I speak to, I struggle to see what on earth to buy and fear that if I do take the plunge when prices seem stretched I run the risk of medium-term setbacks and a very long wait to see any meaningful gains. Trying to “time the market”—buying low and selling high—is by common consent impossible to do with any degree of consistency. Retail investors are constantly warned off the naive belief that they can know when prices are cheap or expensive, but hope springs eternal. Similarly, fund managers point out that our long-term returns can be hugely affected by whether or not we were in the market on a small number of the best performing days, so much so that missing out on the five or 10 biggest one-day rises of the past 20 years would leave you substantially worse off at the end of the period than if you had simply held on through thick and thin. I accept all this, but it’s not enough to turn me into a buyer just now. First, I don’t like buying things that I think are expensive, which makes me guilty of trying to “time the market.” Second, it seems to me that, despite all the warnings that you should never attempt this because it’s impossible, in practice every decision to buy and sell represents an act of market timing. How could it be otherwise? Unless you are buying or selling for reasons beyond your control—immediate, desperate need for cash, for example—your decision is voluntary and implies an opinion that a price is more likely to go in one direction than the other. Trying to argue that a retail investor’s decision to buy or sell is a conscious attempt to time the market and a professional fund manager’s is not seems to me disingenuous. We’re all playing the same game. The only difference is that a wise professional may be a bit less confident of getting it right and a bit more prepared to cut his or her losses quickly rather than holding on in hope. In the end, I can see only two solutions for people who want to manage their own investments. Either we decide that we do not want to be in control of timing our purchases and arrange to invest a set amount automatically on a given date each month, for example. By doing this we will achieve an average price across a long string of purchases, buying more when prices are low and less when they are high. Alternatively, we decide our timing for ourselves and accept that the more often we have to reverse a decision, the more we will rack up in losses and dealing costs to set against our successes. To date I’ve followed the latter course and since I heartily dislike having to reverse poor decisions, this leaves me suspended in an uneasy equilibrium: neither sufficiently fearful to sell what I have, nor sufficiently greedy to buy any more. It’s an uncomfortable time to be a DIY investor.