Market timing and how to manage risk

By Dale Gillham. Published at Jun 26, 2020, in Investor 101

Investors are continually told to leave their money with professionals and to accept swings in the market over the long term, as many believe you cannot time the market. Those who advocate 'time in the market' attempt to discredit supporters of 'timing the market' by pointing to the small number of times the forecaster was inaccurate in order to prove their point.

With the fall into the March low and subsequent rise up, many investors attempted to time their exit and entry into the market and, so far, have been rewarded for their decision, but there are plenty that got it wrong.

That said, in ASICs recent report on investors trading during COVID-19, they indicated that retail investors get it wrong most of the time, which I tend to agree with.

So what is market timing?

Put simply, it is about managing risk, no more, no less. If the risk of holding an asset becomes too high, it should be sold. Just as importantly, if the risk of holding an asset decreases, it should be held, provided it supports the investor’s objectives.

Every week I predict what I believe the Australian market will do in the short, medium, and sometimes long term, and while I get it right the majority of times, sometimes I don’t.

However, just because a prediction does not unfold does not mean that ‘market timing’ is not an effective strategy.

While I am able to forecast moves in the market with an incredibly high degree of accuracy, market timing does not work 100 percent of the time, therefore, you need to be prepared that some predictions will not be correct.

Remember, market timing is about the risk of holding an asset first and foremost, and not about attempting to grab some quick profits, as retail investors are trying to do right now.

While some will get it right some of the time, most will get it wrong.

Consequently, those who were lucky in getting it right in recent times may be in for a big shock, as there is a high probability they will lose the gains they have made over the past few months.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au


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