|
|
|
October 12, 2006
|
|
It Is Not About Timing The Market
|
|
It is about time in the market…
|
Imagine being an investor during a period that included the Asian crisis, the Russian meltdown, the Long Term Capital collapse, the Dot.com era (some would say Dot.Gone era), the worst terrorist attack ever to take place on US soil and the longest bear market stocks have experienced since the 1930s.
Then imagine that some of your investments were in the largest, highest profile companies of the day. Names like Bre-X, Enron, WorldCom, and Nortel.
This all happened in the last ten years, and it begs the question; could anyone make money in a period like that?
The answer, perhaps surprisingly, is yes! Provided you were invested in a diversified portfolio and stayed invested through all of that bad news. In fact, even if you had invested only in equities, even just the NASDAQ, you would have made money. In fact, the only way to have lost money in that period would have been to purchase a limited number of individual stocks or, to have gotten in and out of the market during the period.
Having said that, if you had limited yourself to investing in just the NASDAQ or the Dow Jones Industrial Average you would not have made very much money, considering the ride you would have had to endure. But, if you diversified globally by purchasing units in a number of the broader based markets, say the Toronto Stock Exchange or, the Standard and Poors 500 or, the Dow Jones Industrials, you would have done better. Even with the rally in the Canadian dollar.
Taking it a step further, if you had added some cash, some bonds, and a little European and Far East exposure, you would have done better still - as demonstrated by the performance of the FPX Indexes - both in absolute terms and more importantly, on a risk adjusted basis.
The period described in the first paragraph is from the inception of the FPX Indexes on April 1, 1996 to the end of this past quarter on September 30, 2006. This period encompasses 126 months or 10.5 years. Through this period investors have faced the best of times and the worst of times.
As investors we are all guilty of looking in the mirror from time to time and thinking “had I just done ….”. In good times we look at the gains we missed and in bad times we look at the losses we incurred. And we are never happy, and almost always reacting at the moment, do exactly the wrong thing at exactly the wrong time.
I have yet to find a study that shows the advantages of trying to time the market. In every case I have read, investors lose over the long term. That is not to suggest that your Investment Manager, or the manager of an actively managed mutual fund should not react to changing circumstances. They should and they do. What it means is that making wholesale changes like investing everything in only a few stocks or putting everything in a money market account, is very likely to result in less than average performance over the long term.
Ten and one half years is not a long time from an investment perspective. We hold real estate for a life time, our pension plan assets vest over thirty years. Yet, mutual fund studies tell us, that the average holding period for “long term investors” is seventeen months.
What’s important to understand is that investing is all about the time in the market, not trying to time the market. To make the point we have included a graph charting the performance of the FPX Balanced Index for this 10 plus year period and in the accompanying table, I look at how the major market indices performed over the same time frame.
And when you look at those charts, know that the FPX Indexes, the major market indices, and probably some of the funds you held during this period, all had positions in each of the stocks noted in the second paragraph. They would have been part of a fund’s portfolio or because they were included as part of the index based iShares held inside the FPX indices.
Yet, by virtue of the fact that a fund manager or the index held positions in a large number of stocks and the fact that the position in any one stock was a small percentage of the total value, none of these assets collapsed because those stocks collapsed.
Coming full circle, notice the second graph (FPX Balanced Index The Bear Years) that charts the same information but, for the period of March 2000 to March 2003. This is the bear years, or more precisely, the 3 years that would have been the most difficult period to hold.
I find it helpful to look at both charts side by side because if you look only at the bear chart it is easy to believe that the sky is falling whereas the 10 years plus chart reminds us that there are ups and downs over time and, more importantly; diversified investment portfolios do make money over the long term.
And isn’t that why we hold portfolios?
| Major Market Indices |
Compound Return* |
| TSX Composite Index |
8.128% |
| Nasdaq Composite Index |
6.524% |
| Dow Jones Industrial Average |
7.308% |
| |
|
* Compound annual returns from
March 1996 to Sept 30, 2006
Returns are not converted into Canadian dollars |
|
|
