Personal Investor: Time to stop timing the markets
At any given time, thousands of publicly-traded stocks have more than doubled in value over the previous year. Yet, so many investors will isolate one as a missed opportunity.
It’s silly human nature that defies three basic realities about trying to time the markets: hindsight truly is 20/20, you can’t go back in time, and right now there are thousands of publicly-traded stocks that will double in the next year.
And right now, teams of institutional investors with decades of experience and nearly unlimited resources are searching for those treasures. For most retail investors saving for retirement outside of their nine-to-five grind, the stakes are high.
A 1986 study led by popular U.S. investor and money manager Gary Brinson found that stock selection and market timing account for less than six per cent of the driving force behind portfolio performance. It found overall asset allocation accounts for a whopping 94 per cent of a portfolio’s performance.
A follow-up study in 2000 by Yale finance professor Roger Ibbotson and director of the Morningstar Center for Quantitative Research Paul Kaplan attributed asset allocation to 90 per cent of a portfolio’s performance.
In other words, long-term investment success comes from the sum of a portfolio – not its parts. Strong performance comes from choosing the right asset classes, in the right proportion, at the right times.
The basic asset classes are equities (stocks), fixed income (bonds), and cash. Within those asset classes are subsectors such as consumer, resource, financial and technology. Once you’ve established a diversified portfolio of the best securities, only occasional tweaks are required.
Retail investors who make regular contributions have a further hedge against volatility through what is called “dollar-cost averaging.” Making regular investments helps smooth out the highs and lows of the market, and helps drive overall portfolio performance. It’s the opposite of market timing.