How to Attain Perfection in Investing
Recently, Jonathan Chevreau, of the National Post highlighted the fact that market “volatility reignites market timing debate”
Market timing implies the ability to predict the future movements of the market and the ability to react before markets go up or down. The buy and hold camp, on the other hand believes that it is impossible to predict the future and therefore, you must hang on to a mutual fund through the ups and downs because over time, investments and markets will go up. So what do you believe?
Here is the harsh reality: Neither works ALL the time. The results are inconclusive!
According to Chevreau, most financial advisors would lead you to believe that buy and hold is the way to go because it is the easiest strategy to manage money. Buy now and hold on to it forever! Many investors, however, would expect that professionals should know more than the average person so they should be able to have some insights on trends and patterns of the markets.
Let’s take a more logical approach! The reality is that we would hope that PERFECTION exists in the industry. If there were such thing as perfection, we would not have this eternal debate over which money management strategy is better! In fact, if perfection existed, we would have only one investment to choose from and everybody would own it! There would be no need for advisors, columnists, mutual fund companies, etc.
Unfortunately (or fortunately) this Utopia does not exist. When it comes to investing, I believe in the three “P’s”: There is no such thing as PERFECTION. Rather, investing is the ability to increase your PROBABILITY of being right more often than wrong through a disciplined PROCESS.
What is the probability that “buy and hold” works? If we go back and take a look at the markets over the past 50 years, markets rise 70% of the time and drop 30% of the time. Bull markets also last 3 times longer than bear markets and the gains are usually 4 times greater than the average bear market. These are the facts provided by the research of George Hartman, author or “Risk is Still a Four Letter Word.”
Market Timers now have the benchmark to work with. You must make the right decisions at least 70% of the time to outpace a buy and hold investor. Keep in mind that this analysis ignores other important issues like the cost to buy and sell regularly and taxation of non-RRSP investments.
Remember that both ‘Market Timing’ and ‘Buy and Hold’ are simply different processes adopted by different investors. If a market timer is able to be right more than 70% of the time, who can argue against the results. The best money managers in the world are disciplined – some are market timers, others preach buy and hold and there are even hybrids of these two opposing strategies. Different strategies work at different times in different environments. Sometimes it’s easy to figure markets out (technology was over-priced), and sometimes it’s not (Y2K). Every money manager, financial advisor or investor should have a process that they passionately adhere to. Ask your advisor about their process!
Comfort and conviction will help you determine the best strategy. Just remember the issue of probability when it comes to investing. Nothing works all the time and even great investments, great money managers, and great advisors will make mistakes from time to time. Just make sure mistakes don’t outweigh the successes.