Timing an entry into the stock market is perhaps one of the hardest tasks any portfolio manager, whether professional or amateur, has to do. It is the great law of Murphy that dictates that any windfall or new account only arrives just after the market has enjoyed a strong upward move.
There are two views on how to deal with this. One is to say that timing the market is impossible and to commit the funds as soon as practical so as to capture all further gains. The alternative is to drip feed the money into the market every month over a period of a year or so. That way at least the manager or the investor gives the impression that they are actually doing something to add value. In practice all they are doing is making, say, twelve timing decisions and stock market forecasts rather than one. Since short term movements in the stock market are essentially noise the exercise has limited value and probably won’t make a lot of difference.
What worries people committing large amounts of new money to equities, or switching from other asset classes, is that they will be doing so on the back of a recent inflow of fast money. That means they pay more for the income stream that equities will deliver compared to an entry at a lower point.
What is needed is a simple way of gauging if the market has got too exuberant and is ahead of itself. Luckily, there is one.
Beta is a measure of the volatility of a stock relative to its index. So a stock or a fund with a beta of one will go up and down in line with the market. This is what a conventional tracker or index fund does.
In a rising market the more volatile stocks, i.e. those with a beta of more than one, will perform better than those with a low beta. Although the actual members of the group will change depending on what sectors are in favour two factors are usually associated with high beta stocks.
One is debt and that the other is operational gearing, a fancy way of saying they have low margins.
High levels of debt exaggerate the business performance of a company by expanding the balance sheet…
Hmmm, why would you pay active management fees to a manager that invests across the market with a value bias? It would be more cost effective to invest in a tracker for market exposure and seek the value play through a specialist investment.
