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Do not try to time the markets, you will earn less

Every day, we witness the vain effort of investors trying to time their investments. Many people postpone it for years with the naive hope of a more profitable purchase. However, this is a pointless effort that robs them of earnings. In the end, those who are scared and who speculate, render their wealth worthless.

Radoslav Kasík | Investment academy | 19. November 2018

Each of you who invest or who plan to invest your financial assets more efficiently often think hard whether it is the right time to invest. We, in Finax, are not an exception. Years of experience in the financial markets, however, have taught us that it is a vain effort.

People are mistakenly trying to time their investment. Beginning investors want to find the bottom and the top of the markets, and to make the most of it. This idea is pretty, for the sake of appearance very logical and it would be perfect to know to manage your financial assets in this way. But in fact, it is “tilting at windmills”.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Peter Lynch

Peter Lynch is the legendary manager who ran the most successful Magellan Equity Fund in Fidelity Investments. Lynch was actually one in a million. Under his leadership, the fund earned an average of 29% a year, more than twice the S&P 500 performance. 

No one can predict market trends

A prerequisite for successful investment is to inculcate this basic rule in one´s mind. Otherwise, you will be perpetually unsatisfied with your investments and it will not let you sleep. And, in the end, you will not get such a return as the markets offer you.

Thinking the opposite is a big mistake. There are several reasons for this undeniable fact. First of all, it's our natural qualities and emotions. Other factors are the lack of information or man's inability to encompass their vast amounts.

Last but not least, the very nature of the economy and society is the cause. Just as in human psyche, there are no constant relations in the economy, where one action always causes a certain response.

Exaggerated self-confidence and fear of loss are emotions that dominate the minds of most of the investors, especially those starting out. These are the so-called cognitive brain constraints that are the greatest enemy of a successful investment.

These factors for weaker performance of active investment management are described by numerous studies of behavioral economics and finance that do not look at economics as an exact or rational science but the sphere which is influenced by subjective human decision-making based on psychological motives.

In practice, it means that 95% of Europe's actively managed equity funds, focused on global stocks, have not outperformed the global stock index – S&P Global 1200 Index – over the last 10 years.

And these are funds managed by professional managers who spent their entire career on the financial markets. They have unlimited access to information, powerful analytic tools, and support teams.

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The best evidence of human inability to predict the market developments was the financial crisis in 2008. The vast majority of funds was not able to catch it. The losses of professional managers were generally even larger than the loss of the market itself. Worse yet, most of them have missed the rise of the bull market, and none of them have even anticipated its current size.

In the US, the average investment fund investing in large US companies reached an annual yield of 8.2% by the end of 2015. The average investor in this type of fund for the same period reached an annual yield of only 4.7%. Where did the missing 3.5% go? Into the effort to manage and time the investments.

What makes you different from other people? Why should you be the chosen one, who unlike 99% of people, is able to time the investments, when those far more experienced are not able to do so?

Passive investing

In the US, several economists have developed studies that deal with the relationship between investor´s behavior and the achieved results. All have confirmed that more active investors have in the long run a lower return than the market revenues. In addition to wrong decisions, the higher costs of active investment management also occur.

Moreover, this relation also applies to investors who visit their account more frequently to regularly check the status of their investments. At each visit, the incentive to intervene into the investment emerges.

This distinction in the results between the market and the active investor was identified by the well-known financial writer and illustrator Carl Richards as a behavior gap, which subsequently became financially adopted and is freely translated as a loss caused by behavior.

The mentioned researches quantified the investor´s loss due to frequent and unnecessary decisions ranging from -1.17% to -4.3% per annum in relation to the achieved market returns.

Based on these studies, we, in Finax, created Intelligent Investing and we decided to come up with passive investment. Indeed, elimination of human decision-making and investment automation leads to reduction in risk and costs, which together with the long-term perspective, are key factors for a successful investment.

Similarly, these studies clearly confirm that the attempt to time the markets leads to worse results over the long term and is therefore futile.

“For Successful investment, the time within the market is important, not timing of the market.”

The most important and influential factors determining the success of the investment are the investment period, adjusted to the correct allocation (investment composition), diversification (risk spreading) and regular rebalancing.

Instead of trying to time your purchases, pay attention to the mentioned investment parameters. In Finax, we realize their importance, and therefore we place the main emphasis on these factors when choosing an investment.

Every potential smart investor will be asked at the beginning of his Finax registration about the intention of the investment and his/her risk profile. Based on his/her responses, the unique robo-advisor algorithm selects an appropriate portfolio adequate for the investor´s risk profile.

If you are a cautious person who fears a drop in price of your investment, you will get a more conservative strategy with a larger bond ratio. Fluctuations in such a portfolio are substantially smaller than those with a larger proportion of share.

The selection of a particular portfolio is further subordinated to the expected duration of the investment. The algorithm is programmed so that you are most likely to achieve positive performance at the investment period you specify. This is based on historical statistics of Finax´s Intelligent Investing Portfolios.

Market risk - a risk that has always been taken care of by the time

Market risk refers to the uncertainty of achieving the return expected by investors. Simply put, under market risk we understand the drop in the value of the investment that most of you are worried about. Because of it, you are postponing your investments or making unnecessary changes to your portfolio, which means you are not earning.

Market risk reduces hand in hand with time, as confirmed by the data in the table below. The prolonging period of investment gradually eliminates the market risk to zero, as you can read in this article.

The longer you let your assets work, the lower the chance of a loss. Similarly, your earnings are growing faster with rising investment horizon thanks to the compound interest.

The average investment period for active accounts in Finax, which our clients have set while opening their accounts, is 17 years, which we greatly praise. From this point of view, market fluctuations are absolutely negligible, and at this period, our clients do not have anything to worry about.

When is the ideal time to start investing?

We have revealed the successful investment rules on this page. We have offered tips on how to behave in downward markets in this article. Today, we'll supplement them with recommendations when and how to start investing, especially for people hesitating and thinking about investing.

Be active where it makes sense – in making and saving money. Regarding the investment, you do the best if you ignore your own emotions and opinions on the financial markets direction, as well as the advices and help of “professionals”.

In the first place, do not speculate about investment instruments. The cornerstone of asset building is passive investing in indexes. Everything else is more complex, risky, expensive and ultimately less profitable. Unless you already have indexes in your portfolio, do not allocate a fraction of your attention to other instruments.

Start investing today

Try tax smart investing through low cost ETF funds.

If you do have a sufficiently long investment period, there is no reason to hesitate to invest or to try to time the market entry. As we have already demonstrated, you will not be successful in doing so.

If you do not have sufficiently long investment period, find the money in your budget that you can leave aside and invest for as long as possible. Only the long-term investment ensures you interesting returns, generates more money and increases the value of your assets.

If this is an insurmountable barrier for you, your property will never increase in value.

Start as soon as possible. Make investing a part of your life as soon as possible. Only through investing will you understand the rules of the markets.

Have a sufficiently large liquid financial reserve. Do not delay investing. Instead, use market drops to buy, in order to decrease the average purchase cost.

Now think about how long is it you are thinking about investing. When did you first come up with the idea of placing some of your money aside and investing into something? You have always found an excuse, haven´t you?

Was it 5 years ago? If so, you have lost a return of 55% (9.2% per year). Or was it during the crisis 10 years ago, when you were firmly convinced that the market would drop even lower? Indeed, it did drop, however, nothing has changed in the rationality of the investment. Today the value of such investment would be almost three times higher than the initial investment (appreciation of 187%, 11.1% per year).

If you want to make your assets grow, forget about timing your investments. Stop hesitating and start investing.

Radoslav Kasík
Radoslav Kasík
Chief Investment Officer
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