When Investing In Shares, Timing Is Everything
The past year has been a challenging one for investors, with markets facing significant challenges and political events that were significant enough to trigger major moves in asset markets. Should investors try to time these events and move in and out of markets? We grapple with this issue almost every time market volatility spikes and investment returns come under pressure.
2016 commenced with very sharp downward moves in global equity markets on the back of fears of a serious slowdown in Chinese gross domestic product (GDP) growth coupled with a cyclical low point in commodity and energy prices. It soon became apparent that the China slowdown fears were exaggerated, then commodity prices bottomed mid-February 2016 and then began to rally. The market slump of early 2016, like many before it, proved to be an attractive purchasing opportunity. This slump was very puzzling as the rapidity of the sell-off was at odds with what was a broadly positive and improving global economy. Our message to clients at the time was to, “Sit tight.”
Markets rallied strongly from mid-February 2016 until the surprise result of the UK vote to leave the European Union (EU), which no one really saw coming. Again, the Brexit vote result took most observers by surprise with few people really contemplating the full implications of the Yes vote, including those who actually voted yes. Markets were caught by surprise by the vote, resulting in large scale sell downs. The Bank of England stepped in and cut UK interest rates and the pound weakened significantly, both strong positives for the UK economy. The result was a strong recovery in UK shares that has continued almost uninterrupted since the days following the Yes vote.
The US Presidential election was the next event to spook markets. Hillary Clinton’s use of a private email account for official emails when she was Secretary of State and the FBI announcing an investigation into this ended her chance of winning and placed Donald Trump in contention for the White House. With the Trump victory now a real chance, his policies were at last taken seriously and found to be strongly positive for US GDP and US corporates (via planned tax-cuts and deregulation). Trump’s win has propelled a rally in US and global equities which continues now almost without pause, with US shares reaching new records every few trading sessions.
The message here is that timing markets is very difficult and can catch many ‘experts’ out, as the past 12 months has shown. If you sell your shares when markets are volatile, often you will miss out on the recovery, which can come when least expected and can be very rapid. Studies from IESE Business School in Spain show that over the past 40 years, missing out on the 10 best days would have cost investors about half of their capital gains from their share investments. If you miss these trading days your returns will suffer. In addition, buying and selling too often will incur transaction costs and you may miss out on dividends while you are out of the market.
An important part of our role as advisers at PKF Wealth is to help our clients navigate the emotional challenges that the markets regularly throw up. Much of the financial news that the media presents every evening is really just noise and should be treated as such. It has very little to do with the achievement of long-term returns from a well-constructed and diversified portfolio.
During these times of volatility, maintaining the confidence of our clients is paramount – and staying the course of the right strategy through tough times means that there are some challenging periods. Now that the results are evident through a volatile cycle, these strategies have produced some very pleasing results across investment portfolios of our clients. This reminds us of the need for patience and a longer term focus to achieve the goals of our clients and to not be distracted by the daily ‘noise.’