I read a newspaper headline “ Investors miss the boat again”.
The article looked at the flow of funds into managed funds. In the last quarter of the year, when financial markets were on the up, investors put $285 million into managed funds. But in the first 3 months of the following year, when financial markets were falling (getting cheaper) investors only put $81 million in.
Was the increase based on past performance rather than future prospects? Did some of these investors buy in at relatively high prices? Probably.
A study tracked fund flows in and out of 10 New Zealand share funds for the 3 years. For any investor who just sat in those funds for the 3-year period the overall return was a very respectable 42%.
By monitoring the timing of cash inflows and outflows it was determined, however, that the average investor was not very good at just waiting. They felt the need to be doing something - either buying or selling. The study suggested that the average investor return over the period as a result was only 23%. They lost ground against a sit and wait policy by being active.
A similar study in the United States suggested that the average investor managed to lose 11% over a 5-year period instead of making 63%.
Does it make relatively little difference when you invest as long as you do. Take the New Zealand share market for instance. A study on the market from 1963 to 1992 - 30 years, calculated what the return would have been if you had invested $5,000 on the best possible day each year ie the day each year on which the market was at the bottom or cheapest.
The investment would have grown to $646,058 or an average annual return of 13.1%.
If you had invested on the worst possible day each year, when the market was at its highest, the investment would still have grown to $521,936 or an average annual return of 10.11%.
The best day of the year is not likely, but then neither is the worst.
The fact is that very few, if any, professional fund managers are able to consistently pick markets and time their entry and exit.
If they have difficulty doing it with the resources, they have at their disposal then for the ordinary private investor it must be very difficult indeed.
Forget any concern that you might invest at the wrong time each year.
It’s time in the markets that counts more than the timing of the investments.
