Sometimes the gloom gets you down.
Working in the markets, sometimes you can get a real solid feeling of how various fund managers are positioned, and what their expectations are for the market in the near term. There has certainly been a feeling in an around markets that while there are some pockets of decent value, the stock market in general feels “full”. The job of a fund manager is of course to navigate full cycles, investing in times of both perceived low-risk and high risk. Imagine my surprise, then, when I read about a fund manager who intends on returning all of his fund’s capital, citing the “overvalued and dangerous” nature of the current market!
Mr Philip Parker, a 30 year investment veteran who is the Chief Investment Officer of Altair Asset Management, indicated that he would be selling all of his fund’s investments in order to preserve client assets. He noted that he is giving up both management fees and performance fees (which on $2b AUM, is not insignificant), but is not winding up the business, merely disbanding the investment team for the time being.
Mr Parker believes that valuations in the market are stretched, that Australia suffers from significant dangers from its property market, issues in China could have a flow on effect to the Australian market and the unpredictable US political environment raises risks for investors. In particular, he is worried about the overvalued property market. Stating that he’d never been more confident of anything in his life, he noted that it was time to step aside.
Despite raising a million other questions (I have some strong feelings in particular about fund managers collecting performance fees in good times and then closing funds when they won’t be making performance fees), the article got me thinking about a one question in particular – is it a good idea to time the market?
Is market timing a good idea?
I’m not going to tackle the argument around missing the 10 best days or the 10 worst days has on investor returns. A million other blogs have tackled the exact same issue. Heres an excellent and balanced treatment. Of interest is the idea that the ten worst days often follow the ten best days, and vice versa. Sometimes sitting aside from large losses will cause you to miss the largest gains.
I’m going to go out on a limb here – for investors focused on dividends (which are less volatile than stock prices), timing the market is not a great idea. In particular, waiting for a large crash in order to be invested is not a great idea, and underperforms dollar cost averaging in both absolute and risk adjusted terms.
Am I saying valuations don’t matter?
Of course not! There is a wealth of information indicating that current valuations are strongly linked to 8-12 year equity returns. This implies that there are some moments where it is sensible to be wary of the stock market. I mean, it should be self-evident that if the market is at all time highs valuation wise that future returns are going to be lower, and vice versa. Do I think we are somewhere near that point in Australia? Not really (although I reserve the right to be wrong!)
What about the property market, and Trump, and Chinese debt?
These things are worth worrying about, particularly on a stock specific level. If you are investing in individual companies, and these themes effect your companies, you need to have an informed view on these things. On a broader, Australian market level? These things probably aren’t worth worrying about too much. The fact of the matter is, there will always be macro situations that can affect company earnings in Australia. There has never been a situation whereby the future earnings power of Australian companies is permanently impaired or destroyed. If these factors affect companies in the short term, over the long term, the resilience of the Australian economy will eventually win out. Recessions caused by property imbalances or Chinese debt crises will not impair the Australian markets future earnings power.
Stay the Course:
I’m a fan of dollar cost averaging. Its what I do, basically. Every month, more money goes into stocks, and every year, the amount of dividends I receive increases. I also like the idea of allocating more money to the market in the evnt of significant dips – I have a facility in place to allocate more to equities if they fall more than 15%, and more still if equities drop 30%. That’s in my long term plan. I am aiming to follow that long term plan.
And you should follow your long term plan. If you don’t have one, you should either educate yourself or go and visit a financial planning professional who can help you develop a plan based on your personal goals and situation.
Just know that in the likely even that you do abandon your plan and it works out (say, you stop allocating to equities and the market falls a lot) – how will you feel about re entering the market? Do you honestly think, that after a huge fall in the market, there won’t be another set of large risks on the horizon? Don’t be the person that is forever waiting for a crash to invest. It’s a terrible strategy!
PS – if you are an owner of a fund whereby the manager is happy to take your fees in the good times but then wants to hand back your money when the market is difficult (and arguably when the individual investor needs professional expertise the most), you should fire your fund manager.