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Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
|
We continue our series of articles about how investors can
improve on the performance of their portfolios. Most investors understandably worry
quite a lot about their investments. But in many cases these worries turn out to
be counterproductive. Many people often focus their attention on a few
positions in their portfolios, selling positions that have not performed well
in the short term, and in the process crystallizing losses. When those same
stocks bounce back, investors are often too late to get back in and miss out on
the opportunity of participating when those positions return to growth.
This kind of behavior is often referred to as “timing the
market”. This approach has proven many times in the past to be very difficult
to get right. Often it is better to find
a quality stock and hold it for the longer term. The results are often better in those cases,
because respectable returns in equities generally are driven more often by the
length of time holding the position, or ‘time in the market’, rather than trying
to trade in and out of a position, or ‘timing the market’. It is extremely difficult for investors to
predict when individual stocks or even stock indices will rise or fall, and
often the investor will set a predetermined expectation of return that is
extremely difficult to achieve. It also
requires diligent monitoring of the position, and often the most opportune
times to get out (or in) are missed because one is never 100% certain that a
bottom (or top) in the position is reached.
Even professional investors have a difficult time with ‘timing’ on
individual positions, as can be seen by the poor performance of many hedge
funds in the U.S. in 2015.
Chart 1 below shows that if you had missed the ten best days
of the market over 20 years between 1993 and 2013, your annualized return would
be almost 4 percentage points lower than the market’s return over that period
(5.49% vs. 9.22%). And it is very easy to miss ten good days of the market over
20 years for most investors. In fact, it is quite easy to miss the 60 best days
of the market over a 20 years time span while engaging in market timing. In
this case, your annualized return would be -4.39%, instead of +9.22%.
Chart 1 The cost of
market timing
We continue our series of articles about how investors can
improve on the performance of their portfolios. Most investors understandably worry
quite a lot about their investments. But in many cases these worries turn out to
be counterproductive. Many people often focus their attention on a few
positions in their portfolios, selling positions that have not performed well
in the short term, and in the process crystallizing losses. When those same
stocks bounce back, investors are often too late to get back in and miss out on
the opportunity of participating when those positions return to growth.
This kind of behavior is often referred to as “timing the
market”. This approach has proven many times in the past to be very difficult
to get right. Often it is better to find
a quality stock and hold it for the longer term. The results are often better in those cases,
because respectable returns in equities generally are driven more often by the
length of time holding the position, or ‘time in the market’, rather than trying
to trade in and out of a position, or ‘timing the market’. It is extremely difficult for investors to
predict when individual stocks or even stock indices will rise or fall, and
often the investor will set a predetermined expectation of return that is
extremely difficult to achieve. It also
requires diligent monitoring of the position, and often the most opportune
times to get out (or in) are missed because one is never 100% certain that a
bottom (or top) in the position is reached.
Even professional investors have a difficult time with ‘timing’ on
individual positions, as can be seen by the poor performance of many hedge
funds in the U.S. in 2015.
Chart 1 below shows that if you had missed the ten best days
of the market over 20 years between 1993 and 2013, your annualized return would
be almost 4 percentage points lower than the market’s return over that period
(5.49% vs. 9.22%). And it is very easy to miss ten good days of the market over
20 years for most investors. In fact, it is quite easy to miss the 60 best days
of the market over a 20 years time span while engaging in market timing. In
this case, your annualized return would be -4.39%, instead of +9.22%.
Chart 1 The cost of
market timing
 |
Source: Charles Schwab Company (2012) via
Investopedia.com
|
A buy-and-hold strategy is also called a passive investment strategy.
As the numbers above show, this strategy brings dependable high returns over
longer periods of time. There are also more active investment strategies which
can bring good results. However, it is advisable to obtain professional
investment counsel when using active strategies.
Michael Zienchuk, MBA, CIM
Investment Advisor, Credential
Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204
Mutual funds and other securities are offered through
Credential Securities Inc. Commissions, trailing commissions, management fees
and expenses all may be associated with mutual fund investments. Please read
the prospectus before investing. Unless otherwise stated, mutual funds and
other securities are not insured nor guaranteed, their values change
frequently, and past performance may not be repeated. The information contained
in this article was obtained from sources believed to be reliable; however, we
cannot guarantee that it is accurate or complete. This article is provided as a
general source of information and should not be considered personal investment
advice or solicitation to buy or sell any mutual funds and other securities.
The views expressed are those of the author and not necessarily those of
Credential Securities Inc. Credential is
a registered mark owned by Credential Financial Inc. and is used under license.
Credential Securities Inc. is a Member of the Canadian Investor Protection
Fund.
