A salutary tale – market timing is hard

Investors almost ritually make the mistake of buying high and selling low

Dalbar, financial research group

Marketing timing is hard, so hard that even the most experienced and respected professionals struggle to exit and enter the markets at the right time.

Early in July 2010, when market sentiment was perhaps at its worst, one revered financial markets professional announced he had sold half his equity holdings. Stocks had fallen nine times in 10 days and all the talk was of a double-dip recession.

His timing was just slightly out, as that point in July marked the beginning of a turnaround in stocks that took the US top 500 up more than 8 per cent over a four week period. He then announced he’d changed his mind and started to rebuild his position in stocks.

It doesn’t really reflect badly on this professional’s skills as an investor as he has quite a following. It does show the great difficulty facing even the most experienced and well informed investors in perfectly judging when to get in or out of the market.

Recent research by US financial research firm, Dalbar, demonstrates that many investors missed the boat in 2009 by moving into ‘safe’ investments like cash and missed the upturn when it came.

The best protected investors, Dalbar found, were those who worked with advisers that put their clients first. By contrast “do-it-yourself” investors tended to under perform those advised by a fiduciary.

So it’s a familiar story. Investment advice is not about making predictions about the market.

It’s about education and diversification and designing strategies that meet specific needs of each individual. Saving investors from their own very human mistakes such as over-reacting rather than staying the course.

From an original article by Jim Parker, Dimensional Fund Advisors