Market Timing? … that’s easy!

Years ago at a foreign exchange course we were asked to participate in a practical simulation game. Prior to commencing the game one of the participants had a moment of clarity.

Participant: “So, what you’re saying is that we should buy low and sell high?”
Organiser: “Well … Yes.”
Participant: “Oh, that’s easy!”

What seems so easy in theory is anything but in practice. It’s a valuable lesson which few learn until late into their investing lives. Timing your entry and exit from a market is an appealing concept that seems a simple and smart way to add value.

What is it that makes it so difficult to turn this theory into reality?
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Should cash distributions drive investment decisions?

Money to live …

It is not at all uncommon for those in retirement and near retirement to be concerned about the amount of cash distributions their investment portfolio is paying. Often, their objective is to be able to live off this cash and, thereby, keep their initial capital intact.

Typically, such investors understand they need to be concerned about the long term safety of their portfolio. But, at the same time they require some scope for capital growth to avoid the possibility that they will run out of money.

Therefore, they tend to go towards a balanced/growth type portfolio, allocating 40-50% to what they consider “defensive” assets and 50-60% to “growth” assets. Provided their asset allocation has been determined appropriately (see “The Asset Allocation Decision”), this sounds eminently sensible.

However, their focus on cash heavily influences the types of “defensive” and “growth” assets they choose. These choices may, in fact, totally undermine their asset allocation decision.
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