It is interesting to go back and look at market predictions and how they panned out.
Three weeks ago asset managers surveyed in the Sanlam Investment Management (SIM) Investor Confidence Index were expecting a short-term correction in the market, especially as fears over debt levels in countries like Greece grew. However, managers were then expecting a recovery, which would see the year end in positive territory. Plexus Asset Management, however, argued, based on analysis of historical trading averages, that we could expect a short-term rally followed by a weaker market, which should see the market in negative territory in three to six months’ time.
Well, so far Plexus is right. Since then the markets are up a massive 7%, definitely a strong short-term rally. This highlights the danger of timing the market — short-term markets are very difficult to predict and even sophisticated fund managers would admit that they are doing well if they get it right more often than wrong.
Investors who were convinced by the short-term bears in this case may have sat out the market waiting for an opportunity to invest in a cheaper market. They have now lost out on some very strong market performance. But now do they listen to the other side of the camp (Plexus in this case), which believes that weaker markets are to follow, or do they stick with the majority of asset managers who believe we will end off the year in positive territory?
The answer lies in remembering exactly why you invest in shares in the first place. You are investing in a company, which in return pays you a portion of its earnings in return for your investment. This is called a dividend. A good company will grow its profits over time and increase its earnings. As a result you, as the investor, will receive more money (dividends); therefore the share price will reflect this reality over time. In the short term there will be reasons why the share price falls or runs ahead of its earnings, but over the longer term (three to five years) the share prices will reflect the reality of its earnings.
The key is not to overpay for a company so that it takes years of earnings to catch up to the price you paid (this relates to the price:earnings ratio). If you have bought a share at a reasonable price, whether the markets move up or down over the following six months will be of no consequence. Once of the best ways of not getting caught up in market timing is to invest on a monthly basis. However, if you do have a lump sum to invest and given that the market has already run up 7%, it would be sensible to phase in the money over a period of several months. If there is a correction you will still have the opportunity to invest a portion of your money at lower prices.