PHNOM PENH - "Are we at the bottom yet?" It's the US$64 million question and one that I hear a lot of nowadays - especially from my clients who are keeping an anxious eye on the markets in the hopes of buying in at "the right time". They are trying to do what everyone else is - buy low and sell high.
Buying low and selling high - be it funds or stocks or property - is much easier said than done. And, unfortunately, as I tell my clients who are attempting to "time the market", it is a practice best left to the professionals.
Instead, we - as serious, goal-orientated investors - are much better off investing with regular contributions into a well-diversified portfolio that allows us to weather the hard financial times and take advantage of the good times. The chances are that, with this approach, we will be better off. After all, timing the market can have disastrous consequences.
The dotcom boom of the 1990s was a perfect example of how people can lose out by trying to time the markets. During this period, lots of investors tried to invest in the next big thing, which, at the time, was internet and technology companies.
Many investors jumped in as those particular stocks shot up. Unfortunately, most of the stocks that did shoot up came crashing down equally fast, causing many to panic and sell at huge losses. We - as sensible, serious investors - would have known better. We would have ridden through this period with regular contributions that would have allowed us to benefit by buying up more stocks and units at "corrected" low prices. In the long run we would have made higher annualised returns. To prove this point, if we look at a 10-year period from 1992 to 2002 we will notice that the S&P 500 earned average annual returns of approximately 10 percent. And this was even with September 11, 2001 - where the Dow fell by 11.9 percent over the course of that particular year - and the Enron Scandal in 2002, a year in which the Dow stock market fell by 22.1 percent.
Even with such losses, had we put our money in stocks during this 10-year period from 1992 to 2002 - and left it there - we would have realised an average annual return of about 10 percent per year by the end of 2002.
Had we invested with regular contributions throughout this period we would have reaped the benefit of dollar cost averaging - and would also have benefited from the lower priced stocks and funds during the periods of crises.
The benefit of dollar cost averaging is that the technique provides an opportunity to continue investing during sharp downward corrections (as is possibly the case in today's markets), thus increasing the overall annualised return over time. It also reduces the risk of taking big losses and/or selling at the wrong time as is often the case with those trying to time the markets.
So, let's resist the urge to become market timers! Instead let's leave the practice of timing the markets to the professionals. We should concentrate on setting clear objectives and timeframes for our portfolio. We must also remember to diversify.
And finally ... in order to benefit from these times of extreme volatility - where it is sometimes difficult to predict exactly what is going to happen next - let's reduce our risks while still making gains by contributing to a regular investment plan.
After all, Your Money Matters!
Trevor Keidan is managing director of Infinity Financial Solutions, a firm providing impartial, tailor-made personal financial advice to clients in Cambodia and Southeast Asia. Should you wish to contact Trevor, please send an email to [email protected].