Dare to be a lone wolf investor
Investors are losing out by chasing performance, according to a new study.
By Paul Farrow 11:27AM GMT 23 Nov 2010
Have you invested in a fund after learning of its stellar gains and thought, "I want a piece of the action"? If so, you are not alone – but it is likely to be costing you dear. A study by The Cass Business School, commissioned by Barclays Wealth, has found that
timing decisions by private investors since 1992 have cost them an average of 1.2 percentage points a year because they have chased performance.
Andrew Clare, professor of asset management at the school, says: "A buy and hold strategy would have turned an initial investment of £100 into £311; however, because of the poor market-timing abilities of the average private investor, the typical investment would only be worth £255.
The difference of £56 arises because people tend to invest more after periods of strong market performance and withdraw it following periods of weak performance."
Tony Lanser, director, Barclays Wealth added:
“Private investors have long been chasing returns by attempting to time the market but our research proves that this hasn’t always delivered."
The study backs up the long-held notion that people have a knack of mistiming their investments. Take gold, for example. Nobody wanted to touch it when it languished around the $265 an ounce mark 17 years ago, but as soon as it broke the $600 mark in 2006, investors began to climb aboard – and they still are climbing, as the price hurtles towards $1,500.
On the other hand, thousands of investors piled into technology funds at the beginning of 2000 after a long period of soaring returns. The bubble burst and technology values fell sharply. More recently, as the Telegraph's Your Money section has revealed,
many investors ditched their equity holdings when the stock market dropped sharply in early 2009, and have missed out on its subsequent recovery.
Andrew Baker, chief operating officer at Skipton Financial Services, says: "No one truly knows what will be the next year's top performing fund, and anyone whose financial adviser tells them that they have a crystal ball and can predict the future is being led down the garden path.
"The danger of timing the market is that investors are invariably waiting for the markets to move and then jump on the bandwagon, thus missing out much of the growth they would have had by already being invested. Trying to second guess the markets is a fool's game. The most reliable strategy is to spend time in the market, rather than try and time the market, and to diversify your portfolio."
Indeed, there is the well-trodden argument that
"it's the time in the market, not out of it, that counts''. According to Fidelity, if you had invested £1,000 five years ago in the FTSE All-Share, it would be worth £1,316 today.
However, if you had missed the best 10 days of the FTSE performance your sum would be worth just £718; and if you had missed the best 30 days you would be left with just £372. Fund management groups say it is important that investors stay invested for the long term and do not attempt to dip in and out in the hope of avoiding any lows.
The "time in the market" argument makes sense, but it can seem flippant when it comes to the prospect of losing your hard-earned cash, and given the global outlook, a degree of pessimism is understandable.
But you do not have to invest a lump sum and test your powers of buying at the right time. There is another option that is overlooked by most investors:
the regular savings plan.
Saving smaller amounts of money on a regular basis reduces the risk of losing a hefty chunk of your savings if share prices take a steep dive. Of course, the opposite is true, too, and you will not make sharp gains if markets shoot up quickly.
For example, if you had put a lump sum of £9,000 in the average UK All Companies fund three years ago, you would be sitting on a fund worth £9,130.43 today. If, on the other hand, you had drip-fed £250 a month over the same period (a total outlay of £9,000) into the same fund, you would be in the money, with its value now at £11,138.94. This is because investors benefit from pound cost averaging – basically, you are buying more shares for your buck as the market falls.
So is it better being a lone wolf investor? Certainly some of the greatest investors have gone against the grain and been handsomely rewarded.
John Maynard Keynes is perhaps the most famous contrarian investor of them all. It is worth remembering what he says in the aftermath of the Great Depression in 1937.
"It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind.''
One of the most unfashionable areas, and therefore potentially a winner, is Europe in light of the debt crisis, first with Greece and now with Ireland. Yet these two countries, and Portugal and Spain which also have problems, account for a small proportion of Europe in investing terms.
"Despite a perception of sluggish growth and an inefficient corporate sector, European companies have been transforming themselves over the past two decades, helping drive consistent outperformance from European stock markets," says Stephen Macklow-Smith, portfolio manager at JP Morgan. "Worries about deflation and sovereign debt defaults all appear overblown. Instead, the outlook for European equities appears attractive."
Adrian Lowcock, at Bestinvest, says there are opportunities in Europe, but warned investors that
it could be volatile. He recommends Ignis Argonaut European Income or Neptune European Opportunities.
Contrarian investing is certainly not for the faint-hearted, especially when you are putting your cash on the line. It is probably why investors always plump for a fund or stock that has risen the most. Robert Burdett, at Thames River, says:
"Consider phasing (drip-feeding), as it also works well in volatile conditions. Focus on the long term and have the courage to buy more into any dips in the markets."
Mark Dampier, at Hargreaves Lansdown, admits it is not easy to be a lone wolf investor.
"In truth it's always difficult to go against the crowd. It probably needs to feel intensely uncomfortable for an investment to be 'right', and it may need a lot of patience. Unfashionable areas are Japan, Europe and UK smaller companies."
Mr Dampier put some of his own money in Japan (a perennial unfashionable area) early this year and admits that his contrarian bet has yet to pay off. But he says investors should consider Jupiter Absolute Return, managed by the highly regarded Philip Gibbs, which has had a poor year; and PSigma Equity Income, managed by the experienced Bill Mott, which is full of unfashionable stocks such as telecoms and pharmaceuticals.
"Everyone is buying mining and commodities and many fund managers, through no fault of their own, have been left behind," says Mr Dampier.
"There is nothing wrong with investing in the areas that have been performing well. The key is to get off in time."
http://www.telegraph.co.uk/finance/personalfinance/investing/8152770/Dare-to-be-a-lone-wolf-investor.html
