Smart investors buy when others panic sell
by Emma Wall
The Sunday Telegraph
Sunday 15 January 2012
Private investors always seem to get their timing wrong. But it's vital not to follow the crowd when markets take a dive.
Investors have gone and lost their nerve again. The deepening eurozone crisis and fears of another recession has seen investors ditch equity funds at levels not seen since records began 20 years ago.
British investors pulled out a record £864m from equity funds in November, compared with monthly average inflows of £506m for the previous 12 months, according to the Investment Management Association (IMA).
You would be forgiven for assuming that as all the rats were leaving, the proverbial ship must be sinking. But in November the FTSE 100 index rose by 1.5pc - not bad in comparison to earlier months.
Signs that investors were getting jittery surfaced a month earlier. In early October the FTSE 100 index stood at 4,950 but three weeks later it had risen to 5,750. True to form, private investors missed out, with fund sales falling in September to their lowest levels since 2008 as the FTSE tanked to below 5,000.
It has been said before and it will be said again, but history shows that, more often than not, at the exact time that investors choose to abandon a market in their droves, the stock market flourishes.
Equity funds have now seen net outflows in four of the past five months, after more than two years of net inflows, but over the past five months the FTSE100 - despite the bumps along the way - has risen.
Of course, it is almost impossible to time stock markets - even professionals miss the peaks and troughs. The key, suggest the experts, is to ride out the volatility.
It's human nature to run for the hills when shares fall, but such behaviour can be counterproductive. This is why many experts argue that it's your time in the market that counts, rather than your market timing.
Data from investment platform Fidelity FundsNetwork found that it was better to be invested in the market through thick and thin than risk missing the days with the greatest gains.
The figures show that £1,000 invested in the FTSE All-Share index 15 years ago would now be worth £2,272. If you missed the index's 10 most profitable days that investment would be worth just £1,229. Miss the top 20 days and you lose cash, ending up with £811.
Tom Stevenson, investment director at Fidelity, said: "Market timing is notoriously difficult because doing it successfully means going against our natural instincts. The most successful contrarian investors are able to reverse the emotions that guide our behaviour in the rest of our lives."
Not surprisingly, the most recent IMA statistics showed that investors had opted for perceived safer havens, such as corporate bonds and balanced funds, which invest in a mixture of shares, bonds and cash. Bond funds saw sales of £443m in November, a marked increase on the monthly average of £332m.
UK absolute return funds were the second most popular category, even though, as this section highlighted earlier this month, most failed to deliver positive returns in 2011.
Alan Steel from Alan Steel Asset Management agreed that all the research showed that investor outflows of an asset class were a buy signal.
"Just look at returns in equities since the end of October," he said. "Experienced old heads like Neil Woodford or Bill Mott of PSigma have gone on record to say they've not seen such value in shares in their time in management."
Mr Steel is not suggesting that investors will have a comfortable ride and admitted that volatility would plague markets for a while to come. "If you can, hedge your bets drip-feeding money in, or follow managers such as Sebastian Lyon at Troy Trojan or David Jane at Darwin."
There are other reasons investors should not panic.
Economies and equities rarely sing the same tune. Many companies have healthy balance sheets, having re-energised their businesses in the wake of the 2008 financial crisis and subsequent recession.
Despite the volatility, equity markets are also "discounting" - or assuming - little or no earnings growth and perhaps even a modest drop in company earnings, suggesting that their shares offer decent long-term value for the strategic investor.
It is understandable that investors are in a cautious mood. The financial crisis and recession changed many savers' psyche. It is no longer as much about the return on your money, but about the return of your money.
Yet whatever your disposition, investing is still about being in it for the long term.
Mr Steel added: "Investing with success isn't about knee-jerk short-termism. It's about buying cheaply and following the example of Rip Van Winkle. Buy and sleep on it."
Quote courtesy of The Sunday Telegraph
15 January 2012