Market Tactics

Common to all investment styles should be an overall game plan, which incorporates clear criteria for stock selection and a disciplined monitoring process. However, as investing in equities is not an exact science, not all private investors will utilise the same approach when choosing shares.

As a case in point, the primary focus of an investment strategy need not be stock selection. As well as concentrating on specific companies, an investor may consider the additional impact of macroeconomic and political influences on the outlook for equities, and consequently endeavour to add value by tactically moving in and out of markets.

Embodied in this strategy is a recognition that market movements are not solely a function of stock specific information. Rather, broader factors such as interest rates, economic forecasts and political surprises will affect performance.

Given such uncertainties, the temptation may be to liquidate your equity holdings and temporarily move your proceeds into the safe haven of cash deposits. Yet, while everyone aspires to sell at the top of the market and buy at the bottom, the perfection of market timing over the longer term has proven particularly difficult. Indeed, staying out of the market, on the expectation of lower prices, can yield significant detrimental repercussions for portfolio performance.

For example, if you remained fully invested in the U.S. market over the 9 years, 1990 to 1998, you would have earned an annual return of 16.9% per annum. This would have fallen to 11.6% if you had missed the 10 best performing days and 5.2% if you had failed to be invested for the 30 days when the market recorded highest gains. Therefore, over the long haul, with few exceptions, staying out of the market carries greater risk than remaining fully invested.