October was a horrible month in the share market – but only if you wanted to sell shares.
But, as is the way with these things, it was a good month if you were buying.
The ASX 200 opened the month at 5,435 points, and then closed at 5,317, a fall of 2.2%. Here is how it looked on Google:
The trend has continued in the early days of November. As of Thursday November 3, the market has fallen another 2%.
If you wanted or needed to sell shares in October, this was bad news. How bad depends on what the market does next: if it rises again, then selling in October simply manifested the bad month. Selling locked in the loss.
But if it keeps falling, then selling in October will have been the way to go.
As financial advisers, we are often asked what the market is about to do. Here is a little secret: most of the time, no one knows what the market is about to do. Very occasionally, recent moves in the market are obviously driven by something that will need to be corrected. And longer term trends tend to ‘fall back to the mean,’ which is a fancy way of saying that things tend not to stay above or below average for very long. Periods of strong growth in prices are followed by periods of low or negative growth, and vice versa.
If only people could tell you when these changes will take place. By the way: Economists call these times the ‘points of inflection.’ That is, the point when an upward rising line on a graph turns down, or vice versa.
The best most investors can do – and it is effective and well worth doing – is aim to manage the timing risk inherent in a volatile market like the stock market. Timing risk is the risk that you will buy when prices are temporarily high (that is, share prices fall after you buy) and/or sell when prices are temporarily low (that is, share prices rise after you sell).
In strict economics, the term ‘risk’ is a neutral one. The chances that prices rise after you buy is also known as risk – sometimes called ‘upside risk.’ But that is not the risk we are worried about. The risk we are worried about is ‘downside’ risk. The risk that you will either lose money or miss out on making money. The risk of being poorer than you would have been otherwise.
To minimise the impact of this risk, it pays to spread buying and selling out over time. The logic is that if you do this over a long enough period, then the volatility in the market will be smoothed out. You will sometimes buy when prices are high. That’s bad. But you will also buy when prices are low, which is good. The same happens with selling: sometimes you will sell when prices are about to rise. D’oh! But other times you will sell when prices are about to fall. Bravo!
When you approach buying and selling with this mindset, you can also start to think separately to the crowd. If you are buying, then falling prices are good news (for the same amount of money, you get more shares. October was a good month for buyers). If you are selling, then rising prices are good news.
This is quite different to the ‘mood’ that we see described in the media. In the media, rising prices are always seen as good news and falling prices are always seen as bad news. It is as if everyone is a seller, all the time. Maybe buyers don’t read the news.
Consider these recent headlines:
ANZ Shines Amid the Gloom;
Australian Share Market Follows Wall Street Plunge;
Nine news sports presenter announces retirement.
OK: that last one was not so dire. But you see the point. The media will never announce a fall in share market values with a headline such as ‘Market Offers Great Time to Buy.’ And a rise in the share market will never be headlined with something like ‘You Should Have Bought Yesterday.’
But we can all translate the headlines in our own minds, depending on whether the state of the market is good or bad news for us.