No secret formula to time the market, but you may get around uncertainties in investing

Most seasoned investors know that there is an inherent uncertainty in investing.

We offer our capital to companies not knowing for sure if they will succeed or fail, but it is that very uncertainty — and its associated risk — for which we are paid.

On May 10, the United States decided to impose US$200 billion (S$274 billion) of tariffs on Chinese goods, intensifying the US-China trade war just when it had appeared to be simmering down.

This led to market turbulence as investors rushed to sell off equities and grab bonds. Most of them were too late, taking losses in the process.

Then, at the recent G20 summit, the US and China agreed to restart talks and US President Donald Trump allowed Chinese technology giant Huawei to do business with American companies again.

The US Federal Reserve then came out to say that they might be cutting rates to support the economy.

Stocks promptly rallied and bonds fell, and investors once again fell over themselves to reverse their previous actions, suffering more losses just to end up back where they started.

This process happens repeatedly in investing. It isn't surprising, then, that many investors fail to achieve decent returns.

Not only does the continual flip-flopping often involve buying high and selling low, but investors also incur transaction costs from every trade they make.

The financial media and the industry's trove of experts are always eager to offer neat theories on market behaviour.

Central bank policies, terrorism, earnings reports, crazy politicians, financial regulation and even spurious market indicators such as planetary movements or NFL Super Bowl winners are all fair game when it comes to explaining why the market is going up, down or nowhere at all.

Investors who are already in the market have a natural desire to pre-empt uncertainty or respond to it.

Timing the market helps them feel that the market is predictable and they are in control. Yet while they may sometimes get it right, the opposite is far more likely.

Some investors prefer to rely on market experts (or “gurus”), and subscribe to their newsletters to help them with stock picks as well as when to buy and sell. 

However, studies (in 2012) and more detailed academic research (in 2017) into the forecasting accuracy of market gurus show that even the best of them do not meet the required level of accuracy to beat a simple buy-and-hold diversified strategy.

So, if there is no ideal strategy to move in and out of the markets, what can investors do?

Here are some pointers:

 1. You don't need to be 100 per cent “in” or 100 per cent “out”. Many investors visualise being either invested 100 per cent in stocks or 100 per cent in cash. However, a blended portfolio of 70 per cent equities and 30 per cent bonds or 50 per cent equities and 50 per cent bonds may be more suited for your financial goal.

Working with a fiduciary goals-based adviser will help you figure out which strategic allocation would be best for you in terms of the risk you can afford to take and the returns you need to get there. Combine this with periodic disciplined rebalancing to achieve the best long-term chance for success.

2. Lock in your gains. If you are on track to meet your goals, there is nothing wrong with enjoying the returns you have already made by adjusting your asset allocation slightly or even trimming some profits off your portfolio.

After a period of good returns, you could put those gains into short-term fixed income or cash-like deposits for safety and spending. This way, you won't feel overly hurt if your investments get hit by a market correction.

3. Average into the market. If you're afraid to invest everything in one lump sum, split it up into smaller amounts and average into the market to spread your risk.

Although lump-sum investing may bring better returns for investors, dollar-cost averaging will spare you the emotional stress of deciding when and how to commit that vast amount of money.

Professor Kenneth French at the Tuck School of Business at Dartmouth College in the US, notes that people feel greater regret about things they did rather than what they did not do.

Most people would find it worse to invest only to lose money, rather than not invest and miss out on an equal amount of returns. Dollar-cost averaging helps to soften that potential loss and makes it much easier for investors to overcome the inertia that keeps them from getting started.

In the end, uncertainty is an inevitable part of investing.

Contrary to what many people think, there is really no secret formula that can tell you the right time to enter or leave the market, or what assets would perform best or worst.

The last few years have shown that even the most seemingly logical investment bets don't always turn out the way they are supposed to — with examples that include betting on Brexit, the last US presidential elections and the recent trade wars between the US and China.

However, as mentioned above, there are still actions you can take even if you cannot predict the future well enough to time the market.

Investing is ultimately just a means to an end — an end that presumably involves peace of mind. There is therefore little sense in giving up that peace to worry about the inherent uncertainties of investing.

ABOUT THE WRITER: Aw Choon Hui is the deputy chief executive officer of GYC Financial Advisory, a licensed financial adviser and registered fund management company.