Using time to your advantage

4 July 2012
Betty Ng

It must be frustrating and worrying for many investors to watch the markets recently: Problems in the euro zone continue to dominate headlines, United States employment appears to be losing steam after some incremental improvements and China's growth has moderated.

Investors perhaps also feel confused by the contradictory comments offered by analysts: Some argue that equities are dead, while others point out that stocks are at their cheapest compared with bonds in six decades and are therefore good bargains.

Some argue in favour of finding a safe haven in bonds amid these global uncertainties, while others remind us that equities remain the best hedge against inflation, an issue very relevant to Asian investors.

Interestingly, however, we are not witnessing the 3 to 5 per cent daily swings in world stock markets that we saw last summer. Current volatility is relatively subdued and suggests that investors have already digested a lot of the news and events.

Stock and bond indices certainly continue to reflect the presence of uncertainties but their "volatility normalisation" attests to the progress that many countries have made in the past year: The US housing market has stabilised and is showing signs of recovery, Europe has finally recognised the severity of its structural problems and is now facing up to the real issues, and, in China, inflation has levelled off, creating room for the authorities to inject stimulus should the economy need it.

Of course, current developments do not make decisions any easier for investors, who like many professional hedge fund managers, are under pressure to produce short-term absolute returns on a consistent basis. This "short-term" can be as little as a week or even a day.

The questions many investors may wish to ask themselves are therefore: Do I have the luxury of time? Do I really need a positive return every week and every month? Are investment returns my only source of income for now?

If the answers are no, then one can shed some of the pressures and frustration of investing right now while also reflecting on how to put one's money to work.

Many small investors aspire to produce the kind of returns that professional investors can generate.
But the current environment can be challenging even for some of the most experienced professional managers.

And while the average investor focuses only on returns, professional investors also monitor the overall risk incurred in a portfolio.

This is arguably the biggest distinction between the two groups. Risk is measured not only as the volatility or potential downside from each individual security but also from the portfolio as a whole, or how all the securities or asset classes move together in different market conditions. The lower the correlations among asset classes or securities, the lower the risk.

This is the reason why professional investors diversify their portfolios. Historically, bonds, equities, and commodities move in different directions.

Within each asset class, correlations among securities also differ. In the current environment, there is even more reason to argue for diversification.

Market performance is increasingly being driven by policies and politics rather than by pure economics, presenting many possible scenarios that are difficult to predict, let alone be modelled accurately.

It appears, for example, that Greece will likely exit the euro zone. But will it be an orderly exit? How will it exit? Will this signal the demise of the euro, or on the contrary, buttress the currency by facilitating fiscal union among the stronger euro zone countries?

Across the Atlantic, who will become President in the United States? How will major policies change? Will the US Federal Reserve implement a new round of quantitative easing? Questions generate more questions.

The luxury of time

Even if we gradually gain clarity on the answers, we cannot be sure about the timing of the outcomes. Back when we had technology bubbles and real estate fever, some notable commentators pointed out the exuberance and irrationality of the phenomena.

Yet no one could pinpoint the timeframe for the corrections to occur. Timing your investments requires an acumen that few people have. It comes from a particular mix of experience, exclusive information and innate intuition that the average investor may simply not possess.

Rather than be frustrated and anxious about current developments, it is probably smarter for investors to simply recognise and acknowledge their powerlessness amid the current market uncertainties.
Rather than trying to pin their investments on certain outcomes or scenarios, they should maintain a certain level of humility by conceding that even the best analysis and guesses can go wrong, and protect themselves by maintaining a diversified portfolio.

Also, instead of waiting to time the best moment to enter the market, they should recognise that timing the market in any condition has always been tricky. The easier and historically proven method to avoid missing out an opportunity or buying at the wrong time is to simply invest regularly in increments.

If we do not need to produce positive returns every week or every month, use the luxury of time to our advantage. It is one of the few advantages we have over professional investors.

Betty Ng

Betty Ng is the Director of Investment Communications at Fidelity Worldwide Investment