The trouble with market timing

The trouble with market timing
  • Investment management
  • 5 minute read

The devastating impact of the coronavirus crisis on global stock markets has left investors reeling and in many cases, nursing substantial losses. Is it ever really possible to time the market and if not, how can investors mitigate the fallout? Philip Young, managing director at Close Brothers Asset Management, explains how the company aim to protect its clients’ portfolios and seek out investment opportunities during the downturn.

Calling the market

Our investment ethos at Close Brothers centres on ensuring that first we meet any cash requirements our clients have from their portfolios. Next, we aim to protect their capital and income streams and finally, we look to take advantage of market opportunities with the potential to generate profits.

Timing the market is virtually impossible, given the sheer difficulty of accurately forecasting the many moving parts which make up modern capital markets.

Instead, over the last 30 years or so, I have regularly used a technique called ‘pound cost averaging’. At key market levels where it seems that the valuation level is broadly attractive and the risk/reward ratio is tilted in favour of long term investing, we feed cash into the equity markets.

For example, reading my notes from the 2007/08 financial crisis, when equities started to look cheap in March of 2009, we invested three tranches of cash into equities on the left hand side of the downturn of the V and then another 3 to 4 tranches on the right hand side of the V, as the markets turned around and started to rebound strongly. Used properly, this can be an effective technique in a downturn.

A focus on strong companies

All of my team’s portfolios are bespoke in that they are customised to meet the specific investment requirements of each client. Most of them have a significant long term exposure to global equities. Historically, these have provided the best general protection against inflation and, in particular, provided a growth in income ahead of inflation and well ahead of that from bonds and cash.

We have been looking to take advantage of the market falls by investing in strong companies such as those that can be found in the US tech sector. Because of their market dominance, these companies tend to have decent balance sheets. We have also been investing in the healthcare and biotech sectors; this is a long term investment theme which the recent crisis has tragically highlighted as an ever important part of the global economy.

We have also been looking at what we believe are the stronger, safer companies within the FMCG (fast moving consumer goods) sectors - those that produce soap, shampoo, toothpaste, detergents and other cleaning agents. These are the essentials for daily living that provide a highly valuable cash flow for us long term investors, and are more likely to support dividend payments.

The benefits of active management

We are active managers and in a market downturn, this sensible and risk-controlled activity can make a real difference to how portfolios perform and the outcome for our clients.

It boils down to this - what is the most suitable strategy for a client’s portfolio at any particular juncture of the downturn and how can we best execute it in these market conditions?

The importance of communication

Throughout any major crisis, it is vitally important to keep in regular touch with our clients and to fully explain all aspects of the rapidly changing market environment. Some of this news may not be that welcome to them but, to retain the trust of our clients, it is important to discuss both the good and bad. We make sure that they understand our efforts to manage risk. For example, since February this year when the coronavirus hit, both our chief executive officer and individual investment managers have been in regular touch with clients, explaining what we’re doing and why. This is one reason why many of our clients have been with us for years – in fact, they’ve remained remarkably calm, because they trust that there is someone right on the other end of the phone with their best interests front of mind.

In short, timing the market is very difficult if not impossible. We believe the best policy is to be patient and invest steadily throughout the downturn, to take advantage of the very interesting long term opportunities that may arise.

This article was first published in The Week and MoneyWeek, April 2020.

Your capital is at risk. Investments can go down as well as up. Past performance is not a reliable indicator of future returns.

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