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Part 3 More about the market

Timing

'The market always rises over time.'

This deceptive statement is used, often by ostensibly respectable brokers, to justify investing in a bloated sharemarket where the odds are stacked against you. The implication is that it doesn't matter too much if the market crashes, because as long as you are a long term investor your shares will eventually recover and be worth more than when you bought in. It is similarly used to discourage blue chip investors from exiting the market when they feel that a correction is overdue. Hogwash! I say it again...Flapdoodle! Bunkum! Such an argument can only be justified if you are quite unable to distinguish one part of a market cycle from another.

If you passively hold your portfolio through a crash, its capital value at some point will probably halve. 'Who cares?', you might ask. 'It will regain its value over time, and meanwhile the dividend flow will continue.' The obvious point though, is that if you had exited prior to the crash, even if it meant sacrificing ten or even twenty percent capital appreciation during the final bull run, you would still be able to buy a significantly bigger portfolio back for the same money. You would have more shares, you would get more dividends, you would be better off. Sorry, but no amount of semantics or cute sayings can disguise that fact.

Of course this is simplifying the argument somewhat. There may be taxation implications in selling and buying back shares and there is the brokerage to be considered. On the other hand, a good sense of timing may mean that you only sacrifice a minimal percentage of bull market gain, if any. Markets seldom crash in mid bull-run with no warning at all. Exiting the market completely sometimes can also be viewed as an opportunity to rejig your portfolio.

Timing ... continued

 


 

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