What Should I Be Doing in These Uncertain Markets?
Your money is like a bar of soap – the more you handle it, the less you'll have.
July was an excellent month for stocks. Following the rebound, you may be in either one of these few different camps;
The recent rally is likely a bear market rally and the overall market is poised to go down further because of soaring inflation and slowing economies around the world. I am going to wait till prices drop further or there is some sign of clarity before buying in.
I have missed the rally and I don’t want to invest now. Will wait for prices to pull back further.
The recent rally is a good opportunity to sell everything, as it appears that we are headed for a 2008-type recession and a market collapse.
It is still too uncertain to invest and I will hold off further.
In the end, the question behind these following thoughts is:
“Should I be doing something different in my portfolio or investments?”
This is actually another market timing question, albeit, dressed up differently, basically it’s asking “How do I buy low and sell high?” More precisely, “Can we find clear trading rules or signals that will tell us when to buy, when to sell, when to switch, and so on?”
The lure of successful trading strategies is seductive. If only we could find them, our portfolios would do so much better; our investments would make more money, we can get rich quick, and we could go about bragging to our family and friends.
The investment management sector is very competitive, pays well, and is full of PhDs and rocket scientists; essentially very smart people. If someone was able to develop a profitable trading strategy, we would definitely see it being employed with astounding results. However, a lot of the investment success reported in the news is usually temporary.
Cases In Point
You may have heard of John Paulson, the hedge fund titan who made billions shorting the US housing market in 2008 — his investment performance in recent times has left many of his investors disillusioned.
And what of Meredith Whitney — the star analyst feted in 2007 for correctly calling the collapse of the financial sector? She has had to settle various lawsuits over the years and eventually shutter her fund.
In 1987, an analyst called Elaine Garzarelli became famous for correctly predicting the Black Monday collapse. She was named top strategist for many years running and had a wide following — only to be eventually sacked by the bank she worked for, and the investment strategies she managed all flopped.
And most recently, famed trader Bill Hwang who made billions, first with Tiger Asia and with his fund Archegos Capital lost everything after his series of bets imploded. He is now being prosecuted.
So if the best and brightest out there regularly get their buy and sell calls wrong, should you be doing it? Even if you don’t make big changes to your allocations, you are often tempted to be overweight in assets that seem promising and want to avoid those that could suffer if certain macroeconomic conditions occur.
Say you deferred these allocation decisions to the professionals. There are a multitude of investment vehicles and funds out there which claim to have a tactical asset allocation strategy to try to benefit from short-term changes in market trends. Morningstar conducted research to measure the performance between balanced funds (60% equity and 40% bond allocation) and tactical asset allocation funds and they found that shifting between asset classes did not lead to any performance edge (shown in the table below). If tactical asset allocation funds which were merged or liquidated were included, the performance difference would be even larger — showing a poorer performance than depicted.
These results are actually not surprising. Successful timing requires two correct decisions: when to buy and when to sell. Research has been conducted to show that even the best market forecasters in the world are unable to achieve a consistent accuracy rate of over 70%.
Why is this 70% number important? It’s because when you string together 2 trading decisions with that level of accuracy, you end up with less than a 50/50 chance. Add to this increased transaction costs and the potential tax consequences (in some jurisdictions) of a short-term trading strategy, and the odds of adding value shifting assets around grow even smaller.
Looking at your portfolio shrink in value during a market downturn can be painful. But investors seeking to circumvent the pain or trying to get a leg up in their investments by temporarily shifting away from their long-term strategy will end up trading one source of anguish for another. You are best served by putting together a comprehensive investment plan, constructing your portfolio from all the best ideas from financial science and sticking to it till the end.
If you are still wondering about what to do during these uncertain times or just want a second opinion on whether you are on the right investment track, come and have a chat with us.
