Super steers around market timing dilemma

Investors are living in interesting times - to misuse an old Chinese curse - and as we rule off the books for January it is tempting to hand out bravery awards for investors who have had the discipline or courage to continue investing. 

 

Hands up if you continued investing in the sharemarket despite the market slump?

Chances are that even if you did not raise your hand you were still investing in a disciplined and regular manner. That is the beauty of our superannuation system - it is a compulsory savings system that effectively means all super fund members are engaging in a contribution pattern known as dollar-cost averaging. 

 

By having contributions deducted from our salaries regularly and sending the money off to a super fund to be invested in (hopefully) a diversified range of asset classes the market timing decision is effectively taken away. Now if you have checked your super account balance this month you may be questioning the wisdom of this approach. 

 

But the value in investing regularly is that you are buying at a range of prices - some lower, some higher - and naturally your money is buying more units or shares when prices are lower. 

 

Now technical academic research will tell you that dollar cost averaging is no panacea for one simple reason - markets tend to rise more often than they fall. 

 

But this takes a purely rational intellectual approach and neglects the emotional influences on us as investors. 

 

It takes an experienced, knowledgeable investor with a long-term perspective to be able to go against the market tide - particularly when the tide starts to resemble a tidal wave. 

 

Dollar cost averaging - a.k.a superannuation - helps us take the emotional influences out of the equation. 

 

But it also plays to one of the truisms of investing - time in the market not market timing. When you study days of extraordinary volatility on our sharemarket one message emerges that tends to surprise people - days of abnormal falls are often clustered closely around days of abnormal rises. 

 

We saw that play out again this month - a headline-grabbing 7% fall in one day but at week's end the sharemarket had finished in positive territory. So people who sold as markets tumbled turned paper losses into reality and probably missed the recovery bounces. It is those types of dramatic short-term market moves that makes market timing such a difficult thing to get right - and something that many professional fund managers would argue you should not even attempt. 

 

It again highlights the fact that in the short-term the sharemarket and the real world economy can at times diverge and even send investors contradictory signals. Sharemarkets are nervous because of things like the US sub-prime mortgage mess - or more accurately are worried about what they don't know - yet our economy is sending off signals of strong demand and the odds are rising that the Reserve Bank will lift rates again to keep inflation under control. 

 

So there is a lot of emotional noise and static around the sharemarket. This is why we should be grateful for a superannuation system that is built around the notion of investing for the long-term.