Developing your investment strategy

Investing vs Speculating

As many investors discover, mapping out an investment plan is the easy part. Sticking with that plan is what separates investors from speculators. To make the most of your investment opportunities, allow your lifestyle to dictate your investment approach – not stockmarket fluctuations. Your goals are what count, so keep them firmly in mind when you make financial decisions.

Are you an investor or a speculator?

Many investors use a consistent, long-term strategy to build a more secure financial future through steady purchases of well-diversified investments. Speculators and market timers are usually less concerned about consistency. They may switch investment philosophies on an emotional whim, sometimes treating their investments more like play money than the serious money needed for security.

Responding to the market

Most people would probably say they are investors, but the question is not so easily answered. During a bull market, it can be relatively easy to be a long-term investor. However, when the stockmarket starts fluctuating, investors’ mettle can be tested – revealing many closet speculators.

For example, according to numbers compiled by the Investment Company Institute, a US mutual fund research firm, investors pulled http://www.1.7 billion out of mutual funds during the August 1998 market downturn. When the stockmarket rebounded in September 1998, investors reversed course, pouring $6.5 billion back into the funds. This kind of emotional response to short-term market fluctuation is just one example of speculative behaviour.

The risks of market timing

Market timers follow a fairly predictable cycle. When prices seem low, relative to historical norms, they buy. When an investment’s value seems to peak, they sell. This cycle is repeated with the next ‘hot tip’. In theory, market timing seems fairly rational, but in practice it rarely works. Even the most sophisticated investors, with years of experience and the best analytical tools, cannot predict the whims of the financial markets. What’s more, market timers are often misled by emotional factors, such as greed or fear. Many end up buying at the tail end of a market rally or selling in a panic at a loss. As shown in the chart below, a market timer who missed the stockmarket’s 10 best months over a 30 year period had a 30-year return, only a little above that of Treasury bills (the US equivalent of UK gilts/government bonds). An investor who consistently invested in, and held on to, equities over this same period earned over twice as much.

Market timing isn’t the solution

Value of http://www., invested for 30 Years

(January 1, 1967 – December 31, 1996)

The difficulty of timing the markets is complicated by the fact that most market rallies occur in brief spurts. Market timers waiting for the right opportunity to buy or sell, risk being out of the market during these sudden market changes.

To benefit from market timing, you must accurately predict the future, not once, but twice. First you must correctly determine when to sell. Second, you must accurately determine when to get back in. Because falling markets can rise steeply within days, your timing must be nearly perfect.

Making decisions like an investor

To avoid falling into the speculator’s trap, focus on the term ‘individual’ before making any investment decision. Your individual long-term goals and your individual financial circumstances – not the daily fluctuations of the stockmarket – should govern your decision.

By focusing on your individual needs and sticking to your investment plan, you could actually benefit from the stockmarket’s fluctuations. For example, one long-term investment strategy method involves investing a set amount at regular intervals. If this schedule is maintained during a market dip, you may be purchasing some strong equities at clearance-sale prices.

Of course, changing your investments during a volatile market is not always speculating. It can be the mark of an astute investor if the reasons for your changes are consistent with your individual long-term goals.

Lifestyle timing: making decisions based on your goals

Instead of market timing, try lifestyle timing. Look at your own investment portfolio and compare it to your long and short-term goals.

Do you need to withdraw money within the next year or so? If so, you might want to reduce your percentage of equity investments.

What about your long-term goals? Short-term market volatility will probably not significantly affect your long-term plans, and you would be wise to stick with your current strategy.To make the most of your investment opportunities, allow your lifestyle (not stockmarket movements) to dictate your investment approach. And in following your investment strategy, use a disciplined system, like the Multi Manager approach.

Disciplined, systematic investing does not promise a profit or protect you from a loss, but it does reduce the odds of you putting too much money into an investment when prices are high, and it also removes the emotional factor from your investment strategy.

Contributed by

Bill Blevins,


Blevins Franks

Trustees Limited