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The trouble with timing

A clear strategy and a diverse portfolio is a better bet than any crystal ball when it comes to investment, writes Dermot Walsh, head of the business advisory team at Davy Private Clients

Equities form a significant portion of most long-term investment strategies. The average return on US equities over the past 100 years was 10.3 per cent. This is superior to other financial assets but average returns varied dramatically: from 8.5 per cent in the 1940s up to 19.5 per cent in the '50s and back to 7.7 per cent in the '60s. In the 1990s, returns averaged 18.1 per cent, falling sharply to -1.0 per cent in the 2000s, according to Deutsche Bank Markets Research Long-term Asset Return Strategy in September 2017. As for the current decade, time will tell.

Timing, clearly, is important. But is it everything? And how do we know when is the right time to invest? That more than anything is the question that exercises investors, worried either they are set for a fall or missing out while others make hay.

It’s the burning question, but it’s the wrong question! There is little evidence to show that timing can be applied consistently to investment strategy. In fact, focusing on timing can lead to behaviour that may be detrimental to generating wealth, such as staying out of markets for long periods; chasing returns by investing late in cycles.

It must also be said that timing the market with any sort of accuracy is extremely difficult. When Davy analysed returns for world equities, since 1990, we found that, irrespective of the timing of investment during that period, 60 per cent of the time investors would have suffered a subsequent 10 per cent decline. Worse still, 40 per cent of the time they would have had to absorb a 20 per cent decline.


And yet despite this volatility, the average return over the period was 6.7 per cent, while average annualised returns over five-year periods were 7.7 per cent. Even investing at the top of the market in June 2007, suffering a spirit-crushing 53 per cent fall, still produced annualised returns of 6.1 per cent to June 2017.

Taking the rough with the smooth

All of which highlights the need for investors to remain calm and carry on. Absorbing some pain, taking the rough with the smooth, is all part of building wealth. To earn the higher returns available from equity markets, you must be willing to accept falls in value along the way.

So instead of attempting to predict the when, investors should focus on the what and how – what are my goals, and how am I going to get there? Here are the key steps and considerations:

Develop a plan with clear goals

In addition to focusing on clear objectives, you are more likely to make better decisions if you have an investment plan. Without one, investors build portfolios from the bottom up, focusing on products and timing on an ad-hoc basis, rather than how investments fit a strategy.

Build an asset-allocation strategy

Research shows that asset allocation is the primary driver of a diversified portfolio’s return pattern over time, so you have a key decision about which combination of assets to target. Regularly rebalancing to your target asset allocation can help minimise taking greater risk than you planned.

Embrace diversification

Diversification is the investor’s shield against not knowing what is around the corner. By having a diverse mix of asset classes and regions, you spread out risk and are better able to cope with the unexpected. A balanced asset allocation, incorporating different risk/return profiles, can also minimise set-backs.

Maintain a cash reserve

Give yourself a margin of safety. As a general rule, two to three times your annual expenditure, kept in safe monetary assets, should see you through market or personal setbacks without being a forced seller in a poor market.

Consider phasing

By phasing investments, you reduce the risk of a significant setback from investing just before a market downturn.

Dermot Walsh is a director and head of the business advisory team at Davy Private Clients. You can contact Dermot directly on 01 679 7788 or by email at dermot.walsh@davy.ie.

Please note that this article is general in nature and is not intended to constitute tax, financial or legal advice. It does not take account of your financial situation or investment objectives.

Warning: Past performance is not a reliable guide to future performance. The value of investments may go down as well as up. Returns on investments may increase or decrease as a result of currency fluctuations.