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OPINION

Good timing

Good timing
February 15, 2018
Good timing

Nevertheless, when such a drop comes it is always an unnerving moment – after witnessing several dozen of them one becomes somewhat inured to it, but there is always the lingering fear that a correction could turn to bear market, and complacency could cost you a packet. In his column this week, our diarist John Rosier offers a useful reminder that panicking can cost you dearly, too, pointing to trades that showed people dumping shares in small companies at whatever price they could get, and missing out on the bounceback since. Those “disposed to bouts of panic” as John puts it, should perhaps use this week’s events to reflect on how easy it is for our own cognitive biases to cost us money.

Another bias that would appear to be the opposite of panic, but which can be equally destructive, is overconfidence, particularly when it is related to an assessment of our ability to time the market to avoid bad days and pile in on good ones. Research has consistently shown that it’s near impossible, and that such a strategy will underperform buy-and-hold, because the market’s strongest days often come when they are bouncing back, which those that have cashed in are more likely to miss. According to research from Vanguard, missing the 10 best days over the twenty-year period from January 1986 would have cost you half of your returns. And there are few tools that can help you time entry and exit points with any absolute certainty. Take the Cape ratio, for example, which despite warning us for some time that US markets are expensive has not precluded the market powering ever higher. 

That said, even though we are advocates of buy-and-hold, there are times when a bit of good timing can turn a tidy profit. And the sell-off in UK property-related assets – a sector that we revisit in this week’s cover feature – that followed the referendum in 2016 provides a good case for both. Exacerbated by the temporary suspension of redemption at some open-ended real estate funds, the FTSE 350 Reits index plunged. But holders that looked past the fear and towards the fundamentals could have hung on to recoup most of the losses by the end of 2017, while those that took the opportunity to bargain hunt would have enjoyed bumper gains.