FP Article 15.13
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Investment Risk -
Market Timing Risk
by Rajen Devadason
Market Timing is a wicked idea. Don't try it -
ever.
Charles D. Ellis
|
Market timing risk is different from
pure market risk. You see, market
risk affects all investors in a
particular market. But market timing
risk is realised - or taken on
willingly - by those who attempt to
time the market.
Many studies have
indicated that time spent in a
market is of far greater value than
time spent attempting to time a
market.
Having said that,
it is important to recognise the
allure of market timing.
|
For one thing, the potential gains from getting
a market timing bet right can be enormous.
However, because investment
markets are seldom predictable, most market
timers tend to only get things right once in a
long while; and pay huge prices when they don't!
This is an article explaining market
timing risk. I hope you enjoy
reading it. But if it isn't what
you're looking for, you're welcome
to search for something that better meets
your needs. Thank you for allowing
me to serve you.
Rajen Devadason |
|
A great way to overcome the
temptation to market time is to write yourself
an Investment Policy Statement (IPS), which
clearly states the goals of the portfolio and
the specific conditions that trigger sensible
asset reallocations.
Let me share with you a
hypothetical situation that might arise in my
own country of Malaysia:
The Malaysian stock market, which
was once known as the Kuala Lumpur Stock
Exchange, is now officially called Bursa
Malaysia. The primary benchmark index of Bursa
Malaysia is the KLCI or the Kuala Lumpur
Composite Index. Bear that in mind, as I take you
through a series of mock stock market gyrations:
Let's imagine you have a
well-chosen portfolio of Malaysian stocks, which
you've put together over several years.
After a long period of inactivity
and range bound motion between 700 and 800
points, the market surges! You decide that with
the CI now at 900 points, let's say, you will
liquidate your entire portfolio.
Once you're done, the market
flies upward a few hundred points more!
You are frustrated and tell
yourself the next time something like that
happens - hopefully after a subsequently severe
correction - you won’t repeat the same mistake.
In due course, the market
corrects. It falls to, say, 600 points before
starting to creep up. You re-enter the market at
650 points and vow not to repeat your old
mistake.
A year later, the market again
soars to 900 points. This time you remain firm.
It continues up for another two days and then,
at perhaps 920 points, it plummets. You think
the fall is just a temporary pull-back and
continue to delude yourself as the CI falls to
500 points and below.
You’ve failed again; this time by
guessing incorrectly in the opposite direction.
In both cases, there was an element of realised
market timing risk.
A few more painful episodes like
this are enough to convince most intelligent
investors that they simply don’t have the
capacity to correctly and consistently time the
market for profit.
I suggest you take the time (no
pun intended) to look deeply at your own
personal capacity for investment risk in general
and market timing risk in particular.
Try to develop your personal
understanding so that you reduce the future
likelihood of committing risk-induced portfolio
suicide at the beguiling altar of market timing.
If you'd like to continue to learn more about
other types of investment risk, here's
additional information for you...
15 Types of Investment Risk
(OR, to sign up for a
FREE
16-lesson eCourse on Investment Risk, please
click here.)
1.
Borrowing Risk
2.
Company Risk
3.
Credit Risk
4.
Currency Risk
5.
Diversification Risk
6.
Industry Risk
7.
Inflation Risk
8.
Interest Rate Risk
9.
Liquidity Risk
10.
Lost Opportunity Risk
11.
Manager's Risk
12.
Market Risk
13. Market Timing Risk
14.
Political Risk
15.
Prepayment Risk
© Rajen Devadason
