Recent market volatility has tested the nerve of many investors and had them asking the question of whether they should liquidate their portfolios and wait until markets return to ‘normal’, or stay invested and ride out the storm.
If you are faced with this question, essentially what you are considering is whether you should time your exit from markets now, and then time your re-entry at some future point. In this article we present some compelling information that you may want to consider before making a decision on this issue.
Markets fluctuate over time, sometimes its minor movements (low volatility) over longer periods of time, sometimes its major movements (high volatility) over much shorter time frames; similar to what we have seen since November 2007. The important point to note is that there is no predictable pattern to market movements; they are completely random.
There is a mounting body of work that supports the notion that trying to time entry and exit points correctly is a fruitless exercise. A recent study by BT Financial Group shows that for the 10 years from June 1997 – June 2007 the Australian All Ordinaries Index achieved a return of 13.07% if you were invested for the entire period.
However, if you happened to miss just the 10 best trading days because you had exited the market with the intention of re-entering sometime in the future, your return reduced to 9.84%. It gets worse; if you had missed the 60 best trading days (only 2 months out of 10 years), your return would have reduced to a paltry 0.42% – you would have been better off keeping your money in the bank. The full results of the study are shown below.
Note: The returns are shown as historical, investment returns are volatile and past performance is not necessarily indicative of future returns.
What all this shows is that unless you have absolutely perfect foresight, you are better off to ride out the highs and lows and resist the temptation to base your investment decisions on what you think is going to happen next, because the odds are that you will get it wrong.
We are not saying that you cannot and should not have an opinion, because we all have one of those. What we are saying is while its fine to have an opinion, do not invest your hard earned savings based on that opinion.
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