Does market timing work? [video]

In this video you'll learn:

• why investors should block out market noise and refuse to speculate;
• why it's important to plan ahead and be prepared for big events; and 
• why investors shouldn't react in the heat of the moment.

Transcript

Robin Powell: There were two big political events in 2016 that shook the world. First, there was the Brexit referendum in the UK and then Donald Trump’s victory in the US Presidential election.

Both of those events underlined the importance for investors of blocking out the market noise and refusing to speculate on what may or may not happen. Daniel Egan is Director of Behavioural Finance at the Robo-adviser Betterment.

Daniel Egan: I think they’re wonderful learning opportunities. In both cases, we had very strong and confident forecasts. Not only of what the outcome was going to be but the consequences of the outcome. I think here in the US most polls were heavily favouring Hilary Clinton to win and that didn’t come to pass. Critically as well, if Trump won it was predicted that stock markets were going to crash heavily, and that likewise didn’t happen. So I think the learning experience for investors was number 1: Be sceptical of people who say they can forecast the future. It’s important to be diversified to reduce you concentrated risk that could ruin you if you’re wrong. You wanna hedge all of your bets. And number 2: Don’t mix politics and portfolios. Because it’s doubling down on sentiment and an effect that actually tends to lead you astray.

Robin Powell: Of course, the dust has started to settle, both on Brexit and Donald Trump’s victory. But there is still huge uncertainty — particularly over the future of Europe, and perhaps more concerning, over international relations generally. So, what would Daniel Egan’s advice to investors be going forward?

Daniel Egan: I like to think that now we have known uncertainty. It’s often the really big events are the ones you didn’t see coming. And those risks, those uncertainties always exist. If it’s a natural disaster or something that we didn’t see coming, herewith we have a set of known uncertainties that we can manage and can think about. And I think having a plan and being prepared, especially for those things, is helpful. But it’s very important to not get caught up in events as they happen. To have thought it through in a cold rational state ahead of time. So that when something happens, you’re simply executing a pre-thought-out plan.

Robin Powell:: So, having a plan is crucially important. But what can investors do on an ongoing basis to help manage their behaviour?

Daniel Egan: The most helpful thing investors can do is to set themselves up for success by planning ahead and taking themselves out of the day to day decision making as much as possible. So a very simple example that I give about myself is, I often try and run into work. I do not try and pick out my outfit in the morning when I haven’t had a cup of coffee, I do that the night before, so that in the morning, I’m tired, but I just know what I have to do. I put on my clothes, I go for a run and I come back. I think that we don’t want to have to be constantly making decisions about our portfolios. We should set out a set of principles, here’s how I am going to do this in the future, I’m gonna live by these principles. And set up a process by which I’m going to check in every month, ideally, I’m not gonna check-in at all. I think a lot of people should be using automated solutions that take those principles and make machines do them and make better use of their time. And then finally I’m not going to try and react to things as they happen. Generally speaking, reacting in the heat of the moment is the worst time to be doing something. So unless you are somebody who is completely cold and rational when these things happen, it’s always good to take a deep breath, take a step back and cool off.

Robin Powell: And that’s it for this time. Thank you to Daniel Egan, and to you for watching. Until next time, goodbye.