Time in the market or timing the market – they are the two contrary urges that cause a whole lot of arguments between short-term traders and long-term investors.
And after a couple of weeks of extreme volatility – most of it in the downward direction – both sides will be claiming a victory.
The traders will look at the market correction of more than 10% as a great example of why buy and hold investing is for mugs.
“I got out at the first sign of trouble and now I am waiting on the sidelines all cashed up waiting for the bounce’’ is the sort of snide remark that you get from traders at this sort of time.
Exits get clogged in market falls
Of course, what they are claiming and what they actually did may be two different things as the market exits got clogged and shares gapped down significant amounts.
And the other question for the timing the market crowd is “what did you sell – everything or just 10%?’’
“And what is your plan for buying back – have you got a plan of what percentage drop you are happy with and how long are you prepared to wait?’’
“And what is your plan if stocks start to rally strongly while you are still in cash – will you be patient or jump straight in so you don’t miss out?”
Trading the market is a good theory, but difficult to do
They are all good questions because the theory behind trading the market is sensational but in practice, it never seems to run exactly to plan.
In theory, you simply cash out and stand aside while all of the suckers lose their money and then step in at the point of maximum pain and emerge with a portfolio full of bargain stocks.
In practice, there are a host of individual decisions like when to sell, how much to sell, when to buy and how much to buy and how quickly to buy.
Let alone other considerations such as brokerage, tax and other transaction costs.
Long-term investors also have questions to answer
Mind you, the long-term investor needs to come up with a good argument for holding stocks at a time when they literally shed more than 10% in a week.
Such rapid volatility can make even the most seasoned of share market investors question their long-term plans – particularly if they are using a regular contribution/dollar cost averaging approach.
One of the alternative ways for long-term investors to look at a rapid market slide is to consider such volatility as the price of the superior returns that the share market usually delivers.
As painful as the past couple of weeks might have been, remaining invested throughout 2019, for example, when many people were advocating a sell-out approach was incredibly lucrative, with returns including dividends approaching 20%.
In the long-term returns are around 9%
Over the long term – such as 30 years – the Australian share market has returned around 9% a year – better than most alternatives with the possible exception of real estate.
Alternatives such as cash and bonds might be safe but returns are on the low side and over the long-term they really don’t compensate investors enough to overcome the effects of inflation.
In the end, there is no right and wrong way to invest in the share market.
Some people find that they have the right skills to trade the market and time their entry and exit from different stocks, while others are happy to stick to a mechanical approach of investing a set amount each month in a broad exchange traded fund or listed invested company like Australian Foundation (ASX: AFI) or Argo (ASX: ARG).
And there are of course many paths in between these two, with no right or wrong answers – only good and bad results.
Even professionals struggle to beat the index
Interestingly, when you look at the professional investors, most really struggle to beat the index when you take into account fees and taxes from trading.
Even those that do beat the index can’t often do it year in and year out – meaning picking the right fund manager for every situation is just as difficult as picking the right stock.
As the world’s best investor, Warren Buffett put it, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
And who knows, maybe now is one of those times.