Newspaper article Coffs Coast Advocate (Coffs Harbour, Australia)

Time out Can Prove Costly

Newspaper article Coffs Coast Advocate (Coffs Harbour, Australia)

Time out Can Prove Costly

Article excerpt

EXPERIENCE the state of mind of a hypothetical market timer. Investors can sometimes make decisions based on their emotions at the time and can be disappointed that the results are not what they were hoping for. Chances are that we have all experienced some of the reactions portrayed in this example.

It can be tempting to switch investments or move to cash in uncertain times, but market timing is fraught with danger. This is due to the forward-looking nature of financial markets coupled with transaction costs and tax-related issues that can detract from your returns. There are risks associated with market timing and your portfolio can suffer if you get the timing wrong.

Market timing can be described as the process of positioning a diversified portfolio away from its long-term strategic investment allocation for a short to medium term, in an attempt to add extra returns to the portfolio, by taking advantage of better-performing investments and/or by avoiding poor performing ones.

The following adage sums up our view; aIt is not market timing that counts, but rather the amount of time that you are in the marketa.

The chart shows the effect on investment returns from Australian shares of missing some of the best trading months between the 10 years from May 2001 to April 2011.

Number of best missed months

Percentage of time aout of the marketa

Return

(%pa)

Value of $10,000 invested on 1 May 2001

0

0.0%

8.3%

$22,107

1

0.8%

7.4%

$20,450

2

1.7%

6.7%

$19,059

3

2.5%

6.0%

$17,846

4

3.3%

5.5%

$17,159

5

4.2%

4.9%

$16,097

6

5.0%

4.3%

$15,229

7

5.8%

3.7%

$14,407

8

6.7%

3.2%

$13,643

9

7. …

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