Market Musings 050622: Lower risk stock re-entry

5th Jun '22 by Edmund Shing

10 comments 1884 reads

Market Musings 050622: Lower risk stock re-entry

Tempted by stocks after the 2022 correction, but worried about timing?

Summary:

Trying to time stock market lows is almost impossible
Statistically, investors in general are terrible market timers
Overreacting during times of uncertainty
4 rules of thumb that can help
Amid recession fears, there are still reasons to invest today
Lower-risk investments in stocks for the long term
Idea of the week: L&G Clean Water ETF

This week’s Podcast - why women are better investors

Make Way for Women Investors (link)

Why do women make better investors?
What obstacles stop women from investing?
What is the market potential for women?
What is the financial industry doing to attract women?
What financial products/solutions do women tend to like?

Timing a stock market low is almost impossible

Remember the following idiom?

“A little knowledge is a dangerous thing”

You might wonder why this saying might in general be true.

The most obvious reason is this: that we (and by we, I particularly mean men, as women are less prone to this cognitive error) have a tendency to overestimate our own skill in general.

This can apply to our driving skill - in a recent study, 93% of US drivers considered themselves to be “better than average” - clearly a nonsense in statistical terms. In another study on business startups, 81% of new business owners thought that they had a good chance of succeeding, but that only 39% of their peers did.

This behavioural bias applies equally to investing, where overconfidence in our own investing skill can be fatal to our investment portfolio performance over time.

When it comes to investing, overconfidence causes investors to exaggerate their ability to predict future events. They are quick to use past data and to think they have above-average abilities that enable them to predict market movements.

This overconfidence bias leads to the taking of too much risk in our investment portfolios, usually at the wrong time when investment performance has already been strong for some time.

The numbers say that investors in general are terrible market timers

According to the annual Dalbar QAIB survey of investor behaviour, investors tend to be their own worst enemies in terms of portfolio performance. The average US equity fund investor has underperformed the S&P 500 index by 3.5% per year on average over the past 30 years, resulting in a…

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Foodie

5th Jun '22

Another excellent read, thank you Edmund

DaviStoVest

Insightful and thought provoking as always. Thank you.

The Phoenix

Great article as always Edmund, any current thoughts on bonds a lot of voices have been saying time to start buying them but they had a bad week last week with the US economy posting strong numbers.

This has lead to thoughts that the fed may have to go higher and faster than was thought. Would you still see US 10 year topping at 3% or do you think risks are now to the upside of that figure ?

Regards Andy

sam_whiting

6th Jun '22

How can bonds be a good idea when inflation rate is much higher? If you want safety better off considering a boring 2% dividend with some chance of growth lots of defensive FTSE companies comply.

Not necessarily the case Sam if inflation is close to peaking and US treasury doesn't go above 3% yield and fed start to slow pace of tightening you could make decent double digit capital return's on long dated bonds on a twelve month basis.

cmpeckham

"investors in general are terrible market timers"

This is true, but that doesn't mean that market timing is impossible or shouldn't be attempted. Most investors are terrible investors too and frequently underperform the index. Does that mean they shouldn't invest, or does it mean they should learn how to do it properly?

Probably all stocko subscribers are familiar with the advice from Warren Buffett to “be fearful when others are greedy, and greedy when others are fearful.” What is that advice about, if not market timing? In that case it's a contrarian market timing strategy but there are plenty of others that are trend following instead. These trend following strategies take the advice in the article above to "Never Sell Equities in a Down Market" and simply reverse it to produce some very good returns. There is more than one way to skin a cat.

There are only 2 types of investor that wouldn't benefit from market timing (1) the young who have time for a major bear market to play out and (2) those who don't have the discipline to follow whatever approach they adopt, so they end up using gut instinct to buy at the top and sell at the bottom. For everyone else it's at least worth understanding that, when applied properly, market timing can reduce drawdowns and improve both risk adjusted and absolute returns.

John782

Have you actually read the "research papers" you quote above?
Where you say 'This can apply to our driving skill - in a recent study, 93% of US drivers considered themselves to be “better than average”',
the linked "recent study" appears to have been carried out in 1980, and published in 1981!
The American participants in the study consisted of 81 students with a median age of 22 in Oregon, so maybe 93% of that tiny sample considered themselves better than average, but the wording in the article seems rather misleading.
We don't have to be perfect at timing the bottom to protect our portfolios, but quickly identifying a downtrend can be very useful.

Interesting point, I don’t agree but definitely broadens one’s horizons. FED will find it difficult to please everyone with lower interest rates and money supply/ inflation increasing. If you do like bonds then the Italian bonds will be in a similar position soon and give higher %.

maillotàpoisrouges

There’s a lot to be said for trend following/stage analysis (as in Sam Weinstein et al). Using simple moving averages on a weekly time frame shows that a lot of the market and major indices are in ‘stage 4’ ie downtrend in keeping with the ongoing bear market. The exception is energy stocks. I found this blog very useful.
https://www.wishingwealthblog....

Ive been 100% cash for over 6 months. Patiently waiting to re-enter…..

dinadan

7th Jun '22

Quite possible (but unlikely) for 93% of drivers to be better than average

For example, 93% of drivers could have equal skill, and the remaining 7% being awful. The average will then be below the skill level of the 93%.

Market Musings 050622: Lower risk stock re-entry