Chapter 2 - "Timing the Market & Ego" October Update Net Worth $77,406 (+$2195) - The Incompetent Investor

Saturday, September 8, 2018

Chapter 2 - "Timing the Market & Ego" October Update Net Worth $77,406 (+$2195)


Chapter 2 – Timing the Market & Ego’s


Who here has gone to a party and witnessed a true battle of ego’s taking place? The glorious Williams Street (Melbourne) automotive mechanical engineer proclaiming that they managed to sell just prior to a market correction, and then somehow predict the bull run in cryptocurrency, to then sell at the all time high and then shift their funds into resources prior to its cyclical movement. To most, they appear to have a market understanding challenging the likes of Warren Buffet & Benjamin Braham. Metcalfe (2018, 1) found that simple math proved that you will be more likely to lose than win. Furthermore, a study conducted by Vanguard (2018, 5) found that markets are highly efficient and therefore tend to reflect prices based on the publicly available information; thus, active managers are very rarely able to predict major market movements. In addition, the active fund managers when reallocating asset allocations, must be able to reap the rewards of selling and re-buying whilst factoring in capital gains and transaction costs.


Above is a nice example of a passive emerging market index vs a active emerging market fund. While the years are not current, it illustrates that often active market funds can significantly under-perform the index. Something to have a think about.

Thankfully given the conundrum of timing the markets, with ETFs and LICs, it provides an equal playing field between big and small investors, which is a wonderful thing. The greatest thing about ETFs and LICs is that it takes control from active fund managers and gives you and me more control over our money at a fraction of the cost. There is no need to enter and exit the market on a regular basis unless you are a trader, and if you are a trader, I would apply the 10,000 hour rule. Have you dedicated a life time to learning this art? It is no wonder that most traders fail. I don’t despise active managers or traders. I think many are talented, but for most everyday people in my opinion, passive simple investing is the way to go.

 Also, studies show that ETFs outperform active managers over a long period of time. I am happy to see studies that suggest otherwise over 20+ year periods. In respect to passive investing, there are some perks.  Firstly, you can take a seat in front of your TV, sink into your couch, get yourself a can of coke and check your investments every so often. Secondly, you can grow a cash war chest ready to take advantage of market corrections. Finally, you can sleep well at night not stressing about the single company you own going into possible liquidation. Moving back to timing the market, at a time, I believe even I was somebody who was happy to boast to my friends and family that I managed to buy ANZ and Stock X at all-time lows. However, I was not overly eager to share my losses. This my friends are a fundamental trait of any human. Our egos can get the better of us. 

Naturally, as humans, we feel warm and good about ourselves when we share our successes. I can already envision the hundreds of Facebook statuses over the years. It’s healthy to share your successes with others but in my opinion, there needs to be a healthy balance, and perhaps with personal finances especially, remain humble and reap the rewards of compounding interest using the silent assassin mentality. In my experience, I’ve finally learnt that you should be a humble down to earth investor driving a safe but affordable car living within your means and saving for the future to support yourself, your partner, children and your parents. There is no need to seek acknowledgement from others to feel good about myself.

If others are genuinely happy to hear your experiences to learn and grow, well go for it. Just remember to provide a clear disclaimer that you are not licensed to provide advise! This point of view is obviously very subjective, but I see no positives of going around boasting of your profits. If you insist, please ensure you share your losses too others so they can appreciate the realities of investing and not presume its all-golden roses once you get involved with equities.

In summary, this blog entry advocates against timing the market. It also discussed how I’ve learnt not to run my mouth to others seeking acknowledgement. I’ve taken the silent assassin approach. My ego no longer needs to be caressed. The fact is I am not that intelligent, and I understand that, and as I always advocate, play to your strengths and grow rich at the same time. In respect to my allocations, I will share this in another post. In other words, what I mean by this is, having 70% in equities for example, and 30% in bonds/cash.


(Dalio et al. 2017, 1)

I'd like to just touch base quickly on the growing concern of inequality throughout the world. This picture illustrates that the wealth of the top one-tenth of 1% of the population is about equal to the bottom 90% of the population. The last time this happened, we had the great depression. Obviously times are different today, but perhaps even more of a reason to get your finances in order and remain discipline and focused on reaching financial success.

In respect to my family portfolio, I have added 30% of the family monthly salary into AFIC.   
FAMILY PORTFOLIO CURRENTLY - OCTOBER 
+$2195
Net Worth $77,406 (excluding super) 
ANZ
BKI - LIC
MLT - LIC
VDHG - ETF
AFIC – LIC
Stay tuned for my ongoing progress as each month passes ... 

References



Metcalfe, Guy. 2018. "The Mathematics Of Market Timing". PLOS ONE 13 (7): e0200561. doi:10.1371/journal.pone.0200561.

https://www.bridgewater.com/resources/bwam102317.pdf





Disclaimer: The information on this website is general information and should not be taken as financial advise. I am simply documenting my journey and experience. I am also not a licensed Financial Adviser. You should always seek independent legal, financial, taxation and other advise that relates to your unique circumstances. The Incompetent Investor is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website. 

2 comments:

  1. Solid post, not only about being thoughtful/balanced in investment decisions but also recognising how ego plays a part in swaying decision making.

    ReplyDelete