Trading

The title reference is to the ‘in, out, in, out shake it all about’ line in that dance. I am prompted to write about the evergreen conundrum of market timing, mainly as a refresher, for two reasons.

A perpetual question

Firstly, when I am completing the first stage of my training plans with subscribers, they inevitably become nervous when the time comes to actually make purchases from cash reserves. Secondly, the current climate is one where all 3 of the major uncertainties overhanging financial markets for so long are becoming less unpredictable (US elections, Brexit and Covid-19). One might say, one sorted, one soon to be sorted in a way we can predict and the last looking a bit less disastrous.

The second factor suggest it might be a good time to invest but unusually the pricing of large parts of the market suggest there are only 2 games in town: booming new tech growth stocks and dull low value businesses doing old fashioned things. This makes decisions on purchasing far from straightforward without some discipline and methodology.

Resources

I have written on this subject from various viewpoints before. Here are some reference points (several will be subscriber only):

How to time investment sales

Blog post -June 2018

How to pick a fund for the future or how to be a contrarian

A fable for investors

The last article is quite long and I enjoyed writing it, but it may be tricky to follow for some readers. It serves to show that decisions to take money out of markets and re-invest later can be rewarded handsomely but in most cases, the source of the extra profit is luck.

This article can be understood well enough if you skip past my ‘in’ jokes about the financial system in the back story and start reading from the ‘3 decisions’ paragraph.

Some basic common sense

There is good sense in buying obviously cheap markets after a crash and not piling all your free cash into a market that has been booming for years. But aside from those common sense observations, I would suggest the best approach is to think about the long term and have a simple risk minimisation strategy.

Some years ago the then famous fund manager Anthony Bolton (a contrarian manager by style) used to often say that ‘time IN the markets is better than TIMING the markets’. If you look at very long term graphs of stock markets you will see that he is absolutely correct. The line goes steadily up and unless you have a gigantic screen or very large piece of paper, the compression of short term movements means you will not be able to even see the large drop of say October 1987.

Don’t focus on the wrong data – investment is long term

Two things need to always be born in mind:

Every investor, however skilled or experienced buys the right investment at the wrong price when judged over a week or a month, but that might look like a stunning piece of judgement over 5 years or 10 years. In fact, I personally often buy investments I expect to do well a little early and lose money until the market catches up with my analysis. I don’t mind an initial 15% loss if my investment is up 25% in a year’s time – I might have made a lot less if I had waited and the price had already gone up 20% from the low point.

So rule number one it to not get all bitter and regretful about a fall in price in the early weeks or months of a well thought through fund selection.

The second idea to always remember is that when you invest sensibly (ie in diversified and intelligently chosen blocks of shares), you are just jumping on the capitalist machine. It’s function is to make money for investors and over time IT ALWAYS DOES.

Some of us (me included) find the way in which that happens at times rather inconsistent with our personal ethics, but that is really rather irrelevant – the machine exists as a part of the world and without it, the world would not function – even the Chinese communists seem to accept that.

So even if the machine grinds to a halt due to a malfunction from time to time and some people lose faith in it, it gets fixed pretty quickly. One only loses money from a diversified portfolio of collective funds (irrespective of when you bought an investment), if one withdraws money at the wrong time.

So the thing to worry about is managing your cash flow, not when to invest.

If I could ever claim to have been a good IFA, I would like to think it is because I got people to think about objectives first and short term investment returns second. If you have 3 young kids and can only afford one family car, you don’t start your selection process with 0-60 times and top speeds.

We all keep learning

To improve returns, it may arguably make sense to phase investments of larger sums – I accept that. Refer to the various articles listed above for other angles, but don’t expect a neat ‘this is the trick’ answer – it does not exist!

But we can try different techniques and become a little more skilled. We will make mistakes on the way – the world can mess up the most rational decisions. In investment portfolio construction and purchase, the only perfect science is hindsight