Finance Finance News Can you increase your wealth by ‘timing the market’?

Can you increase your wealth by ‘timing the market’?

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It’s always a little disturbing during a market rout to hear friends and relatives asking “should I sell my shares now?”.

Fear is a great driver of investor behaviour, but usually a sure way to ruin too. If you’re selling as the stock market is tumbling, you have made a big mistake – but the question is, when exactly did you make it?

The answer, usually, is ‘during the quiet time’.

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This year began with some extraordinary stock market volatility, and it’s likely that similar shocks will follow later in the year.

So during a relatively quiet time, it’s important to look at some of the principles of share ownership.

The tricky part is noticing when things are quiet, as no newspaper will ever run the headline: “NATION SHOCKED BY EVERYTHING BEING NORMAL”.

But things are quiet-ish right now.

Crude oil, though still very cheap, is back up to about $US40/bbl. The gold price, which is a key indicator of investor fear, is down 5 per cent in two weeks. And even the shocking terror attacks in Belgium last week failed to unsettle the markets.

As for Australian shares, at the time of writing the S&P/ASX 200 index has recovered nearly 7 per cent from its February 12 low, but is still 15 per cent lower than it was a year ago.

Remember, however, that the S&P/ASX 200 index reflects only the capital value of the shares – the share price – and has nothing to say about dividends paid in the past year.

The chart below shows the growth in share prices over the past 16 years, as well as the total returns that would have accrued to shareholders if they reinvested the dividends – minus any franking credits, which would add to the total returns depending on each individual’s tax circumstances.

With that chart in mind, investors can start to look ahead and, with the help of appropriate financial advice, ask whether their share-holdings match their investment objectives.

Those objectives are a function of your investing time frame, potential risks, and likely rewards of holding the shares.

As indicated above, there are almost certain to be stockmarket shocks this year – State Street Global Investors last week published its top-10 list of ‘grey swan’ events that could lead to market chaos.

But those risks should be viewed differently by a 30-year-old and a 60-year-old holding, say, shares in Telstra or Wesfarmers.

So-called 'black-swan events' can spell disaster for older investors. Photo: Getty
So-called ‘black-swan events’ can spell disaster for older investors. Photo: Getty

To the young investor, the chance of a share wipeout is less of a worry. They probably don’t intend to liquidate those shares for decades, so have the luxury of waiting until all that fuss and bother has abated.

Risks get, well, more risky as you get older – there is less time for investments to recover.

It is older investors, in particular, who should be paying attention to the quiet times and adjusting their portfolios at a time when terrified investors are not ‘jamming the exits’.

Conversely, savvy young investors will do well watching for periods of turbulence. As the old investing maxim goes: “buy on the sound of cannons, sell on the sound of trumpets”.

Financial advisers are fond of telling clients ‘you can’t time the market’, by which they mean it’s very hard to get rich by buying-in and selling-out of shares to profit from each bout of volatility.

Nonetheless, learning to recognise the periods of relative quiet, and calmly using them to recalibrate your investments, is the best way to avoid being trampled when the next rush for the exits occurs.

* This story is general in nature and does not take into account the specific circumstances of individuals. Please consult a qualified financial advisor for specific information relevant to you.

Read more columns by Rob Burgess here


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