Investors, think twice before dodging a bear market

Published September 4th, 2015 - 03:23 GMT

These are testing times for investors. The FTSE All Share had dropped 12 percent from its April peak at the time of writing — and lost 6 percent in August alone.

Combine the daily noise of some hefty stock market falls with grinding declines like those and it is no wonder investors are concerned.

The fear is that this is not one of the market’s periodic "healthy corrections" — to use a much-loved commentators’ phrase — but the volatility that heralds the start of another much bigger drop.

It is easy to see why those fears linger. Follow the line from the post-financial crisis low and there are many reasons why the stock market should have crashed back down to earth by now.

So with all those worries about, should you get out?

The general advice is to stay invested and keep on trucking. 

Yet, for all the lines about "time in the market, not timing the market," who wouldn’t want to dodge a 30 percent decline and buy back relatively unscathed on the other side?

After all, it seems shallow to pretend that this is simply a bout of the summertime blues and nothing has changed. China doesn’t seem likely to negotiate the soft landing we hoped for, global growth is sluggish at best, and the US may have missed the window for its interest rate rise.

Why not take a step aside and hop back in when things look a bit rosier?

The problem is that it is almost certain investors won’t manage to pull this off. The annual Dalbar study in the US highlights how the average investor manages to make significantly less than the market and the funds they invest in.

The study plots average equity mutual fund investors’ returns against the S&P 500 index, which would have provided the easiest and cheapest fund option in a tracker.

Writing on ValueWalk, Gary Halbert highlights this year’s results, which showed that in 2014 the average investor underperformed by 8.19 percent. He adds that the 20-year annualized return for the S&P was 9.85 percent, while for the average mutual fund investor it was 5.19 percent.

This is not because of a fund management industry conspiracy. It’s because too many investors sell low and buy high — running for the hills when the market sinks and piling in when it soars.

Investors’ instincts don’t even need to be wrong to suffer. The Dalbar study says that in eight out of 12 months, investors guessed right about the stock market’s direction the next month — yet still based on their actual buying and selling they didn’t come close to beating the market.

You might get lucky and prove to be the exception to the rule here, but it is more likely that you won’t.

At This is Money we think investing should be a long-term game. Our view is that the best chance you can have for long-term returns is to invest in the best places you can and minimize the chance of making costly mistakes.

Sounding red alerts to duck out of the market doesn’t really fit that philosophy.

Many of our investing readers don’t share that view. I have read countless comments over the past month or so on our articles about how a big decline is coming and it is time to bail out now.

I wouldn’t think to criticize anyone who opted to make that personal choice. My own view, though, is that I am investing for the next decade or more, not for the past six months. 

I have more years ahead to invest than I have had in the past to accumulate my existing pot, so any falls should mean the chance to buy more when the stock market is on sale.

Others will not fit that bill — and it is right for them to use times like these to consider if they are taking too much risk.

If you decide to ride out the storm, the good news is that compared to the big drops from the past three decades — the 1987, 2000 and 2008 crashes — UK shares look good value right now.

This was something that I wrote about earlier this year and touched on in a recent Minor Investor column looking at Barings best places to invest for the next ten years.

It has also now been flagged in a note from JP Morgan analysts Alex Dryden and David Stubbs, which we feature here. 

They point out that on one of my favored valuation grounds, the CAPE ratio, the UK market is below the long-term average. They also highlight an attractive price-to-book level, decent prospects and the fact that the UK economy is stronger than many other developed ones. 

The trouble for the UK is that US shares are overvalued and it’s unlikely we would dodge any fallout from a US collapse in the short term.

Over the longer term though things look favorable, despite Mr Market’s current tantrums.

By Simon Lambert


© Associated Newspapers Ltd.

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