The challenge for those who sold down last year was then predicting the bottom, and buying back into the market at the end of December or start of January.
If you take the example of those SMSF investors who remained invested throughout the past six months, while they are down about 6 per cent down on the value of their portfolio, they have not incurred any transaction costs in buying and selling, and importantly they were fully invested throughout the dividend period ending December 31.
These two points are often overlooked by those trying to time the market. Transaction costs are an important consideration and, together with dividends and franking credits that are missed when out of the market, can have a material impact on the overall investment performance numbers.
While the principle of timing the market might seem simple in practice – that is, buy low and sell high – few investors get it right.
In and out
In fact, what has been shown through academic studies is that those who try to time the market actually underperform those who remain fully invested in the market.
While investment costs and diversification are other important investment considerations that also affect performance, those who try to time the market often get it wrong.
What often happens is that investors sell far too early, and then wait too long to get back into the market.
The end of a bull market will often reward investors with lofty returns, and buying back in to the market when everyone is charging for the exits is often harder than you think.
What the studies have shown is that if you simply miss the “best” days over the market cycle because you are trying to work out whether the market is cheap or expensive, your long-term performance is affected quite significantly.
So what do you do?
A simple option is to rebalance the portfolio throughout the market cycle. If you run a well-diversified portfolio across the range of asset classes, a disciplined rebalance strategy back to your agreed asset class weights will allow you to top up asset classes that have fallen, and sell asset classes that have risen. This eliminates the emotion of trying to time the market.
While rebalancing does require a disciplined and unemotional approach, it gets you off the emotional rollercoaster of trying to predict the daily movements of markets – and the stress that often accompanies that process.
Ben Smythe is a partner and principal adviser of Minchin Moore Private Wealth.
from Just News Viral http://bit.ly/2WnKYGM
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