Jumping Into The Deep End

01 November 2018

Do you remember the tingling, mind-numbing fear you felt when you stood before the deep end of the swimming pool for the very first time? Other people’s coaxing and your fears of drowning would have fuelled the indecision that caused you to pause at the edge.

This same “sink or swim” feeling regularly pervades the emotions of every investor, especially during periods of uncertainty such as what the market is currently undergoing. Investors don’t know what’s about to happen, and that keeps many of them waiting on the sidelines. For those who are already in the market, the uncertainty makes them wonder if they should get out.

You could find a thousand good reasons for not investing. “Perhaps I should wait until interest rates have risen and stabilised.” “I’m not sure what’s happening with China. Trump’s trade war also isn’t helping. I’ll just wait and see.” “Should I wait until earnings season is over to make sure that the company I want to invest in is still making money?”

Emotions typically underlie all this indecision. Investors feel anxious about making a mistake and having to deal with the subsequent regret (also known as being kiasi). But big assumptions also play a part in this indecision – especially the one where investors wrongly assume that there is such a thing as a perfect time to invest.

Problem Number 1

Every investor would like to invest just as the market has bottomed out, and then to sell at the top of the market. But if there were a secret formula to do so, millions would be following it and invariably getting really rich. Yet if millions were doing that, where would all this money be coming from?

In reality, nobody can forecast the direction of the market. This hasn’t stopped so-called investment gurus and experts from creating a thriving business out of many people’s gullibility, writing books and articles or running seminars that people pay for in order to learn their money-making “secret”. If anything, they make most of their money from the millions who throw their hard-earned savings at them in order to discover that key to their success.

Problem Number 2

The financial media love their market-timing stories and newscasts. “Forecaster who predicted the 2008 recession is seeing one for markets now”, shouts one headline. “Trader who made 25,000% on this bet is telling investors what to look out for”, shouts another. We all get hooked on these headlines because the idea of being able to time the markets is very powerful and appeals to many. But at the end of the day, research shows that these prescient market calls are nothing but sheer guess-work. All the story-telling about these strategies and theories may seem interesting, but no one has the time or capital resources to try them all out. If we ever do find something that could work, it may already be too late.

Is there a right time?

Some say that the right time to invest is when you have the money, and the right time to take out your money is when you need it. For long-term investors, knowing if today or tomorrow is the better time to invest is particularly irrelevant, especially if your investment time horizon stretches for over 10 years or more. What is more important is whether your portfolios are structured right at the beginning with your personal risk tolerance in mind, and with the highest probability of achieving your financial goals.

In the meantime, spend your time wisely. Life is short, and should be spent on the things that matter to you. Remember that investing is a means to an end, not an end in itself. When you eventually find yourself on your deathbed, you won’t be worrying about how you invested a day too early or too late, or didn’t find the best market-timing strategy. Instead, the things much more likely to matter then are the relationships you built, the dreams you fulfilled (or failed to fulfil), the time you spent with the people you love, and the legacy you’ll leave behind when you go.


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GYC Perspectives

Markets are often irrational. Even among experts, forecasting does not consistently work. We instead believe in Evidence-Based Investing (EBI), which uses decades of empirical data and the greatest ideas in financial science to optimise investment outcomes. No market predictions, no forecasts, no emotions. All those things rely on gut-feel and intuition that cannot be consistently replicated.

Here, we share with you the evidence on why EBI works and why forecasting doesn't, as well as articles on topics such as behavioural finance to help you become better investors. New here? You can start with this introduction to EBI. Happy reading!

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