NZ Herald 22 July 2006

AIn his case, clearly bad luck.

In some situations, research can certainly help us make timing decisions — such as when to start a business, apply for a job or “pop the question”. (In the last case, the research might involve noticing what puts the loved one in a really good mood!)

Obviously, though, we can’t know when a seven-year drought is coming, or a crazy driver is heading our way. And I would put timing of investments in the same category.

I’ve got a folder full of research that shows investors who try to buy low and sell high — timing the markets — are highly likely to do worse than those who buy and hold.

One example: US managed funds returned an annual average return of 10 per cent over a recent 10-year period. But the average return of investors in the funds was just 2 per cent. They kept going into funds after they had done well and getting out after they did badly.

Another study showed that it doesn’t matter all that much when you buy shares, if you invest for the long term.

Let’s say an investor put $5,000 a year into a New Zealand share index fund over a 30-year period, always reinvesting dividends. And he always did it on the last day of a month — just because that’s the data that were available.

If he were extraordinarily lucky and invested $5000 each year in the month when share prices were lowest, he would accumulate $2.08 million before tax.

If he were extraordinarily unlucky and always invested in the month when prices were highest, he would accumulate $1.65 million.

If he simply invested one twelfth each month, he would accumulate $1.85 million.

The numbers are exaggerated because we make no allowance for tax. Also, past share returns were higher than we expect in the future. Even so, given that the total investment was just $150,000, even half the growth in any of the scenarios would be impressive.

But my main point is that good or bad luck with timing doesn’t make as much difference as most people would expect. And, given that it’s impossible to know which month will be best anyway, you can do almost as well by steadily investing your money regardless of what the markets are doing.

This of course applies much more to long-term investing than short-term. But wise share investors, such as Warren Buffett, the world’s second richest man, are in for the long haul.

One more item from my folder: When US analyst Elaine Garzarelli predicted the October 1987 Crash just four days before it happened, Business Week called it the “call of the century”, according to a PriceWaterhouseCoopers newletter.

But her success was shortlived. Between 1987 and 1996 she made 13 calls that the share market would rise or fall. She was right five times, “which is worse than if she had flipped a coin”.

The moral of these stories: Don’t try to time markets.

AWhat a lovely succinct way of putting it — except, as we’ve just discussed, in situations in which preparation does you no good.