SOMEONE asked this week, "When do we buy the market?" Well, sorry, but if that's what you want to know you're doing it all wrong.
The only time you should be asking when to buy the market is if you are trading "the market", literally. That's to say if you are trading an exchange-traded fund that represents the market like the ASX listed SPDR S&P/ASX 200 Fund (code STW), or maybe CFDs over an ASX index or maybe one of the large listed investment companies that represent the market such as the Australian Foundation Investment Company (AFIC).
Other than that it is unrealistic to be looking for a moment in time when you go "All in" or "All out" and if that's what you're waiting for you're going to be waiting a long time because there aren't many people brave enough to do it, to sell their whole portfolio in one decision or to put their whole retirement into the market on another.
The ordinary investor's risk appetite doesn't allow for that. The ordinary investor is too sensible, thoughtful and considered to make big decisions in small time frames, and the net effect is that the ordinary investor is too smart for their own good debating and delaying until they are buying at the top and selling at the bottom and only ever doing anything when it is bloody obvious, when the whole market is talking about it and when it is being announced on CNBC. And by then, of course, it's too late.
From 1985 until the top of the market in 2007, we saw a long-term bull market driven by a credit (debt) boom and the ordinary investor didn't really have to worry about risk. When the market goes up 9 per cent per annum and pays a yield over 4 per cent it's not very risky and you can procrastinate all you like. But the cost of earning 12 per cent per annum for 26 years without thought or decision is now upon us and the post-credit boom market is not predictable, low-risk and progressive it is uncertain, risky and volatile and it takes a whole new approach not suited to procrastination. The post-credit boom market investor cannot afford to dither because if it's anything like the Japanese market over the past 20 years (seven bull markets averaging 58 per cent and eight bear markets averaging minus 41 per cent) you will have to be a little more decisive.
How decisive are you? Well, it's pretty simple to find out. The GFC saw our market peak in November 2007 and bottom in March 2009. It spent just over 16 months going down. It was one of the few events in living history when an "All out" decision should have been made. So, when did you sell? How constipated is your stockmarket decision making.
If you sold before December 2007, then stop reading. If it took you until March 2008, when the market was down 26 per cent, then you're mortal. If you waited until Lehman Brothers went bust you're going to have to change your game and if you sold any time after that then you just carry on doing what you're doing because without you the rest of us wouldn't be making any money. And if you never sold at all, then you are still living in The Matrix, a fantasy world created by the financial industry that has you brainwashed into thinking that you can't time the market, the stockmarket always goes up in the end and that the only approach is to set and forget. You should be in term deposits, forever.
But, of course, you won't change, the market has, but you won't, and after 26 years of investment success who can blame you. But the post-boom market means a lot of long-term investors have to change, to be a little more decisive and for those of you who will struggle with that, here's a technique for you to think about, to ease that "all in" and "all out" decision-making process.
Forget "the market", start focusing on stocks. Buy and sell the stockmarket one stock at a time. Each trade an isolated skirmish. Break the big decisions down into a lot of little decisions. Buy stocks and sell stocks and the market decisions will look after themselves. Buying and selling "the market"? It's so last decade.
Frequently Asked Questions about this Article…
Should I try to time the market or ask 'when do we buy the market'?
The article argues that asking when to buy the market is the wrong question for most everyday investors. Market timing only really applies if you are literally trading the market (for example, an ETF such as the SPDR S&P/ASX 200 Fund (STW), CFDs over an ASX index, or large listed investment companies such as AFIC). For ordinary investors, trying to pick a single perfect moment usually leads to procrastination, buying late and selling too early.
Is an 'all in' or 'all out' investing strategy smart for regular investors?
No — the article says 'all in' or 'all out' is not a smart strategy for most people. Very few investors are willing or able to sell an entire portfolio or put an entire retirement into the market in a single decision. That kind of binary timing often produces poor results because it relies on being extremely decisive at exactly the right moment.
When would an 'all out' decision have been appropriate during the Global Financial Crisis (GFC)?
According to the article, the market peaked in November 2007 and bottomed in March 2009, with the market down about 26% by March 2008. The GFC was one of the rare occasions when an 'all out' decision would have been warranted. If you sold before December 2007 you avoided the worst; selling only after Lehman Brothers collapsed would generally be considered too late.
What is the 'post-credit boom' market and how should investors think about risk now?
The post-credit boom market is described as more uncertain, risky and volatile compared with the long bull run driven by debt from 1985 to 2007. The article warns that the easy, low-decision investing of that earlier period is over, and investors need a different, more decisive approach to manage greater swings and unpredictability.
How can everyday investors avoid procrastination and emotional mistakes when investing?
The article recommends forgetting the idea of timing 'the market' and instead focusing on stocks one at a time. Break big portfolio decisions into many small trades: buy and sell individual stocks as isolated decisions. That reduces paralysis and helps you act more decisively without needing a single perfect market call.
Does the article recommend ETFs or picking individual stocks?
The article doesn’t give a blanket endorsement of ETFs or stock picking, but it stresses that trying to buy or sell 'the market' is a different discipline (used when trading ETFs like STW or market-focused LICs such as AFIC). For many investors the practical technique suggested is to focus on individual stocks and make a series of smaller decisions rather than one big market-timing move.
What can everyday investors learn from the Japanese market example mentioned in the article?
The article cites the Japanese market over the past 20 years as showing high volatility — seven bull markets averaging 58% and eight bear markets averaging minus 41%. The lesson is that large swings happen and investors will need to be more decisive and adaptable in such an environment.
Is 'set and forget' investing still a valid strategy according to the article?
The article argues that 'set and forget' is increasingly a fantasy for many investors in the post-credit boom era. While it worked during long, predictable bull markets, the current environment of greater volatility means many long-term investors may need to change tactics and be more active or selective in their decisions.
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