Timing the markets ‘fraught with risk', says Vanguard
The recent volatility in the Australian and international share markets should remind SMSF investors of the risks of speculating on the timing of markets and the importance of diversifying, says Vanguard.
Vanguard's principal of market strategy and communications, Robin Bowerman, told SMSF Adviser that the idea investors can time markets to determine the best time “to get in or out is fraught with risk”.
“We know from behavioural finance that when markets get quite volatile the behavioural and emotional reaction is to head for the exit, sell out of it and go and sit in bonds or cash for a while till markets settle back down,” said Mr Bowerman.
“The problem is you typically end up selling out at the bottom.”
The problem with trying to time markets is that investors not only have to decide when to get out but also when to get back in, he said.
“Often people wait for markets to go up 5 or 10 per cent and then get back in and they’ve missed that initial run-up that markets often have in a short period of time,” he said.
In the current environment, SMSF trustees should focus on tuning out short-term market noise and ensure their portfolio is well diversified, Mr Bowerman said.
“It’s really just about getting the risk setting right because I think at times people get overly focused on the returns they’re trying to achieve out of the portfolio without really understanding what the risks are within the portfolio [of their SMSF],” he said.
“In the markets, from time to time there will be volatility, and that should be expected and understood, [but] if you’ve diversified, your shares may be down but your bonds may be up, or property will be up and shares down.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.