Timing the share market is hard – just ask your super fund

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The past financial year has been one of the most volatile on record for stock markets, yet almost every Australian super fund has delivered similar returns.

This not only demonstrates that super funds very rarely make large calls about when to buy and sell, it also gives an insight into what we should do when making our own investment decisions.

Back in mid-February, stock indices in Australia and overseas were at all-time highs. As COVID-19 took effect, stock markets collapsed about 40 per cent in less than five weeks.

Then over the following three months amid massive injections of stimulus, both monetary and fiscal, many of those markets rallied by close to 40 per cent.

A super fund prepared to trust its judgement on timing could have done very well indeed, selling “going underweight in shares” as the news of COVID hit, and then buying “going overweight” when the market hit bottom.

In fact, few did. The data insights firm Chant West reports that most so-called growth funds (exposed to growth assets such as shares) did much the same thing, recording a median loss of 0.6 per cent over the year, gaining 6.4 per cent in the seven months to the end of January and losing it in the five months that followed.

Why don’t super funds time markets?

Super funds are hesitant to aggressively time markets because it is both challenging and risky.

Even with the benefit of hindsight, it is difficult to identify all the reasons why a market moved in a particular direction. It is harder in real time, when a judgement needs to be made about whether a movement will continue.

No single person or firm has access to all information, both public and private, and knows how to weigh each piece of information through time.

Read more: The S&P 500 nears its all-time high. Here’s why stock markets are defying economic reality

Some approaches to timing seem to work for a while and then stop working (a phenomenon known as regime change).

It is the same for investment managers – some have been lauded as successful only to subsequently fail.

Switching strategies is hard

It might sound counterintuitive, but it is especially hard for chief investment officers of super funds to switch strategies.

Investment officers need to front committees.

These days, chief investment officers tend to perform executive rather than hands-on duties.

They can have responsibilities ranging from team management to communications. It is hard for them to get the time needed to bring together all the information they have access to, weigh it up and form a considered view.

Regardless, any view that the chief investment officer does form is likely to be diluted by the bureaucracy of the fund.

Sizeable market calls typically require approval by an investment committee or board, which can lead to a time-consuming, if healthy, debate and second thoughts.

And many super funds are wary of their peer group. They don’t want to take the risk of doing something different which might see them underperforming the funds with which they are compared.

Read more: No snapback: Reserve Bank no longer confident of quick bounce out of recession

Ultimately the sizing of any attempt at market timing is likely to be small. Super funds are big, and find it hard to move without moving prices.

It means that even being 5 per cent underweight or overweight in something is a big call.

It’s even harder for us

Consumers find it even harder to time markets.

Institutions have better access to information and insights, and the people who run them generally have better qualifications and experience.

And we are misled about how consistently they can get it right.

Investment funds usually don’t mention the managers who under-perform, and the media loves winners.

Even Hollywood eulogises the winners: the movie The Big Short tells the story of three hedge funds who made huge profits during the global financial crisis.

Read more: Gambling on the stock market: are retail investors even playing to win?

What it doesn’t mention is that there were more than 10,000 hedge funds at the time and, while a small number made huge profits, thousands lost heavily and had to close.

If consumers are interested in trading, which can be fun and engaging as well as stressful, they need to be aware that, on average, they are no more successful than the super funds, and not particularly successful at timing switches of options within their funds, such as from ‘growth’ to ‘conservative’.

Diaries can help

One way to get better is to keep a paper diary detailing potential positions and the reasons for them, all the time indicating why they should be any better than the positions taken by professionals.

It is critical to be aware of the potential for loss and the financial and psychological effect it can have, how exposed to those losses you are and what your plan is for when they turn up.

Meeting a financial adviser can be a good place to start.The Conversation

David Bell, Executive Director, The Conexus Institute; Associate Investigator, CEPAR, UNSW

Do you follow the markets closely or leave that to the ‘experts’? Do you have a strategy that you have absolute faith in? How did you arrive at any strategy you may have?

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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Total Comments: 6
  1. 0

    I “cleaned” up this time. I moved most of my large super fund out to Cash, I did try other funds like conservative and property but came back to Cash. 5 days week i wrote down
    in a ledger the Unit price of my old balanced fund. It had hit an all time high of $3.55 before the Cvoid19, I watched it go down and down, and had it in my mind that if might go under $3.
    It went to $2.99. I guessed it was the bottom, but wanted to be sure. the next day it moved up ever so slightly, so I moved it all back to the balanced fund. I made 15,203 Units. So I now had 15,203 more units than I did before the crash. I am now up to $3.33 wihich is about $51K and growing on top of my original money.
    I advised my friends around my age to do the same, but everybody was too scared to do it. Oh it will come back they all told me, yes it will come back but you will have a lot more money if you do it. now those friends are complaining to me that they now have to keep working for another year or so, to make up for the money that will eventually come back.
    My ex did this during the GFC, but he tells me he never checked the Unit price, but I think he moved it back at a good time as well. Because he was the only person I know that survived the GFC really well.
    So I am planning by retirement a year or more earlier than planned thanks to Covid 19. I knew I had to do it as I missed out during the GFC and lost a lot of my super, that yes I finally got back but took ages.

  2. 0

    The recent growth in the market has been created by the small investors, mum and dads, who have seen an opportunity, maybe at home more watching the market and thinking they should get in on this rebound.

    Problem is the institutional investors ARE NOT doing the same, they understand that the rebound is false, the economies of countries are in dire straights. You can see by the trades that there are only small amounts going through.

    The market has gone up at a ridiculous rate for the circumstances, we haven’t had the second down swing yet which is inevitable, once that happens and the market falls lower then the mid March low that MAYBE the time to buy.

    The market is a forward looking indicator and usually shows where business is expected to be in the coming year or two; I would expect we will be looking at 5 – 10 years before things look better, the prices of stocks are WAY above what earnings will be for business next year, hell the virus is still rampant in the USA, Europe is having flare-ups, Melbourne is still in lockdown yet the US S & P 500 is at a record high, the ASX 200 only needs another 16% to do the same.

    Where are these profits coming from, 14% unemployment in the US, ours is lower on the surface because of JobKeeper, take that away and our true figure is FAR higher.

    A house of cards….be ready when it falls…..

  3. 0

    The huge bounce we have been seeing since March has all to do with the amount of money being injected into the economy. Most of it is finding its way into the sharemarket and real estate. This is the cause of the boom. So hard to tell how far central banks are going to go with monetary easing, but when the money printing stops the markets will drop again to more realistic levels. I always found it a form of gambling and prefer real estate. I had my super in cash too and went into the balanced option in mid April. It has been quite rewarding, so for once timing has worked for me, but then it was easy to predict this time.

  4. 0

    Greg your comments are very ambiguous ,you say volumes are low but institutions are selling.
    They trade in the same markets as everyone else ! Well done Leek $300k+ in super with the OAP will give you a very secure retirement .I am still very sceptical of the kangaroo markets and wonder if it is time to go half and half again (cash and shares).

  5. 0

    Sorry Greg , made an incorrect assumption .



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