Why is 'Timing' the market bad ?

Ray_Singh-Blue

Over the last couple of years I have tried timing the market and I have tried not timing the market. The results have been similar. But "not timing the market" took far less effort and, paradoxically, far more willpower.

Glen_Clark

grey_gym_sock wrote: »

apart from the risk of fraud (or of huge administrative errors, which could have similar consequences), you're also dependent on the p2p company's underwriting process. picking the individual loans you invest in (which i assume is how you personally are doing p2p - i.e. not using any automatic investment option) doesn't eliminate that dependency.

you want the platform to weed out any fraudulent borrowers. and to make a realistic assessment the risk of loans, rejecting any that are poor risks. if the platform is setting the interest rate, you want them to set a realistic rate for the risk level. in all cases, you want them to give you accurate and reasonably complete info about the loan, the borrower, and the security.

there may very well be a conflict of interest between a platform, which wants to grow its business by having more money lent through it, and lenders, who don't want excessive risk, and certainly don't want the platform to understate the risks of a loan.

from what i've read of people discussing p2p platforms on here, some of these issues are far from being purely theoretical.

in a sense, by scrutinizing the info a platform provides about loans, you're carrying out double due diligence, of the individual loans, and of the platform itself. nonetheless, some of the risk - of there being a flawed underwriting process, or inadequate info about loans provided to lenders - remains at the level of the p2p platform.

Absolutely.:T It can incentivise managers to gamble with investors money when the manager gets a share of the profits whilst the investor is taking all the risk.

Jon_W

BrockStoker wrote: »

Which is exactly what Warren Buffet is planning to do with BH's humungus cash pot. He's waiting for the next big correction/crash according to what I've been reading.

If it's good enough for Warren...

I have wondered about this. I am thinking of investing in passive funds but if you were me would you wait until there's a bit of a 'correction'?

If your answer is yes, would you even wait another 2 years sitting on cash if you think that 'correction' will be post-Brexit?

bigadaj

grey_gym_sock wrote: »

apart from the risk of fraud (or of huge administrative errors, which could have similar consequences), you're also dependent on the p2p company's underwriting process. picking the individual loans you invest in (which i assume is how you personally are doing p2p - i.e. not using any automatic investment option) doesn't eliminate that dependency.

you want the platform to weed out any fraudulent borrowers. and to make a realistic assessment the risk of loans, rejecting any that are poor risks. if the platform is setting the interest rate, you want them to set a realistic rate for the risk level. in all cases, you want them to give you accurate and reasonably complete info about the loan, the borrower, and the security.

there may very well be a conflict of interest between a platform, which wants to grow its business by having more money lent through it, and lenders, who don't want excessive risk, and certainly don't want the platform to understate the risks of a loan.

from what i've read of people discussing p2p platforms on here, some of these issues are far from being purely theoretical.

in a sense, by scrutinizing the info a platform provides about loans, you're carrying out double due diligence, of the individual loans, and of the platform itself. nonetheless, some of the risk - of there being a flawed underwriting process, or inadequate info about loans provided to lenders - remains at the level of the p2p platform.

Fair comment but these things often don't work to the expected logic.

If you take Savingstream as an example then they have had loans defaulted but investors reimbursed via a provision fund and the platform. The regulator is keen to see risk on indivdual loans passed onto borrowers rather than be contained within the platform and so potentially lead to greater risk of platform collapse and teh complications on unraveling loans and administration that would be
involved.

You certainly need a decent level of return to accept the risk you have to accept that on Zopa and Ratesetter are totally inadequate and they aren't even secured. The feeling is that the headline rate on all loans is far in excess of what investors receive plus fees after all.

I think rather as much as there is a risk that rates reduce, or the quality of loans and security is lessened, then rates are reducing in many platforms. There's always going to be an effective reduction taht sensible investors will apply for anticipated defaults so once rates start getting much into single figures then the attractiveness of p2p will reduce for many sensible investors. Continued zero interest rates are pushing less experienced and more naive investors into p2p, meaning that rates are likely to reduce as well as a reduction in loan quality.

Dyor as ever.

stoozie1

really naive question, but how does the advise to drip feed investments rather than pay a lump sum so offset a small amount of volatility differ from the advice to not time the market?

Is dripfeeding essentially not timing the market, while a lumpsum does, albeit accidentally?

AnotherJoe

stoozie1 wrote: »

really naive question, but how does the advise to drip feed investments rather than pay a lump sum so offset a small amount of volatility differ from the advice to not time the market?

Is dripfeeding essentially not timing the market, while a lumpsum does, albeit accidentally?

The advice to dripfeed instead of a lumpsum applies to those of a nervous disposition. Statistically you are better off paying a lumpsum in, errrm, one lump

AnotherJoe

Jon_W wrote: »

I have wondered about this. I am thinking of investing in passive funds but if you were me would you wait until there's a bit of a 'correction'?

If your answer is yes, would you even wait another 2 years sitting on cash if you think that 'correction' will be post-Brexit?

How would you know if there's been a correction? Whats your definition of one? Once prices were falling (for how long and how much?) would you wait until they had dropped a certain amount or until they started rising again? if so how long and how much would they rise before you bought?

Why do you think there will be a worldwide correction after Brexit? What do you think Brexit will encompass (eg what trade deals there will be, with who, what tariffs will there be, etc etc) and why do you think that your vision of Brexit will come about and again, why is that relevant to (for example) US , Hong Kong, China markets?? or were you, very riskily, planning to buy a UK only fund??? That doesn't fit with someone who is so risk averse they will wait two years !!

Also, if your chosen fund rose 20% over the next two years and only then "corrected" -10% on March 29 2019, would you be better off having invested now or after the "correction" ??

If your thinking is like everyone else's though, why haven't prices fallen already? Or if you have an unparalleled knowledge of what will happen in the markets in two years time, why arent you so rich that you dont need to ask about investing in cash?

Finally, "if i were you", I'd do whatever you would do, which I will guess will be prevaricate and eventually start investing a little bit at a time, so little it makes no difference whatever happens.

OTOH, if I were me, which I am, I'd be fully invested within my chosen equities allocation. Spare cash all used up after in the weeks after the Brexit vote panic.

bowlhead99

stoozie1 wrote: »

really naive question, but how does the advise to drip feed investments rather than pay a lump sum so offset a small amount of volatility differ from the advice to not time the market?

Is dripfeeding essentially not timing the market, while a lumpsum does, albeit accidentally?

Dripfeeding a lump sum that you already have on hand is basically saying...

- I want it to be invested in fund xyz;

- and if that amount of money had already been invested in fund xyz for years I would probably be OK with just leaving it invested because ultimately I do want this investment;

- but there is a bit of a psychological cliff-edge here where if I move this money straight from cash to investments and go from 0 risk to 100 risk, the market might crash over the next few months and then I would have lost half my money and then I would cry;

- so instead of buying the fund that I want and can afford to buy right now, I will instead take an average blend of investment returns: half the risk and rewards of the fund and half the risk and rewards of cash as I drip the money over from 100 cash 0 investments to 0 cash 100 investments over a protracted period;

- if I do this, I accept that statistically more of my money will be invested at a higher cost (because markets go up over time which is why I am buying the investment in the first place), and I will miss out on dividends or other types of investment income while a proportion of my money stays in cash instead, and there might still be a crash at the end over my one year period of dripping, immediately after my money is all fully deployed, without me having enjoyed a full year of growth first, causing me to still lose half my money and cry.

- so, I could end up considerably worse off, by 'timing the market' and deferring my average date of purchase rather than spending a longer time exposed to the market.

- however it is a psychological crutch, to see my funds gradually grow as I feed money in, and if my fears are realised and there is a crash that happens to happen in the next 12 months instead of the 12 months after that, I will not be scared because I am still feeding money in and now it's cheaper so "it's not all bad news". By the time I get to the end of the year of dripping I am used to seeing my fund price go up and down all the time and generally more comfortable with the concepts so if there is a crash after that point I am hopefully less likely to sell everything in a blind panic or rage, causing myself financial damage when the market recovers without me;

- so, the 'advice' to drip feed the money you already have available for investments is a psychological aid to those who do not have the stomach to move from zero investment risk cash to high investment risk investments, in one hop. Another valid piece of advice for that person would simply to be to fully invest it now but select lower-risk funds - rather than artificially create a virtual medium risk fund with a blend of high-risk fund plus retained cash;

- drip feeding is mentioned by investment manager or investment platform websites as a compellingly lower-risk way to get started because it is easier to convince someone to commit to a few hundred a month than to pile in all their life savings into risk assets all at once. But statistically / probablistically, you would get a better return to pile it in on day one. That probability is common sense and something that is a result of thousands of simulations of historic data, but there are clearly plenty of times that it would have worked out better to have dripped it. It just depends on the shape of the performance chart over the period of drip, which you can't possibly know.

- most of us do in practice drip feed because we are investing money as it becomes available (e.g. monthly from ongoing income from a job, or annually when we get a new ISA allowance - which is still drip feeding in the long term grand scheme of things);

It is only when you have a surprising big lump sum available to invest (because you got a windfall, or you have been in cash all your life and only just discovered investments exist) that you are likely to feel there is some sort of cliff-edge on which you would be teetering if you went 100% investment instead of a blend of investment and cash for the next few months. So at that point someone will suggest you drip it if you are less confident in your outlook.

kidmugsy

Ray_Singh-Blue wrote: »

Over the last couple of years I have tried timing the market and I have tried not timing the market. The results have been similar. But "not timing the market" took far less effort and, paradoxically, far more willpower.

My guess is that timing is likeliest to work when the investor faces the mother-and-father of a bubble or bust. The last couple of years in the UK perhaps haven't involved those, though Wall St is looking bubbly at the moment.

Also it depends on what the investor's purpose is. Not everyone's circumstances will require him to try to beat, or equal, the market.

Glen_Clark

AnotherJoe wrote: »

What do you think Brexit will encompass (eg what trade deals there will be, with who, what tariffs will there be, etc etc) and why do you think that your vision of Brexit will come about and again, why is that relevant to (for example) US , Hong Kong, China markets??

To add to our difficulty the only information we will have will be old news put out in the media. Wheras professional investors have hired 'Self Employed' Members of Parliament with inside knowlege