Market crash: The secret to investment timing

22nd September 2011

Every stock on the FTSE 100 fell in opening trade today, as traders joined a renewed flight from risk, reports the Financial Times (paywall).

The latest bullet came from the Fed's ‘Operation Twist', greeted with a dismal sigh and a drop of 145 points on the FTSE 100 to 5142 this morning. This follows a torrid August, with a rollercoaster ride that saw the index sink below 5000 points, before rebounding and then plunging as low as 4935.

Who knows what's next?

But while uncertainty has made caution the overriding factor in many investors' decisions, with many surely dominated by the noise of "market crash" headlines – the flipside is that this turmoil creates opportunities for savvy bargain hunters.

Yet for the brave, when is the right time to take the plunge amid the turmoil?

Timing the bottom for banks

Barclays made the biggest loss among financials, falling 4.4% to 146.8p. However, all of the stocks on the list of the biggest 10 fallers were either resource stocks or banks, reports the Financial Times (paywall).

One of the enduring topics during the financial turmoil has been whether – or when – to buy bank shares. For instance, take Royal Bank of Scotland (RBS), which reached a high of over £10 per share in 2007, and has now slumped to a ‘bargain' price of 22.3p. Lloyds and Barclays tell a similar tale.

But the story isn't so simple. Nick Kirrage, manager of the Schroder Recovery Fund and a Mindful Money blogger, says on his blog: "If the proverbial alien had visited earth in March 2009 when the shares of RBS were trading at about 12p, they might initially be impressed on returning today to find that price had since doubled. Such a sentiment would presumably be lessened, however, once they discovered that, while they were away travelling the galaxy, RBS's shares had at one point ventured up above 50p.

"Living the share price every day may be human – if not alien – nature but it is never going to help your perspective on investment. What is important is whether you are taking decisions and making money in absolute terms. Everybody wants to time an investment so they do not have to take the pain of seeing the share price drop for three months before it heads back up. Everyone wants to buy at the bottom but it is precisely that approach that stops people investing and making money."

When it comes to banks, many may doubt that they are to return to their glory days anytime soon with the barrage of guns they face – not least the recent Banking report, today's Fed statement and continued Greek fears.

Even if the banks could avoid all these bullets then they still have to dodge "rogue traders", Greek default, and further exposure to bad loans in Spain and Italy to name a few. But asset managers believe there is still an upside to be gained.

However, Nick says on his blog: "Investment is all about perspective – you must not live it day to day but instead think about it on its merits, in absolute terms and over the long term. Specifically with regard to Barclays, Lloyds and RBS, which have barely been out of the news in the last few months, these are businesses you want to be holding for the long term because, for the risk you are taking, you want to be around to see not just the doubling of the share price but the several doublings we still believe are possible."

Keep your powder dry, hold fire – and take a prudent approach

Headlines prompting fear and further volatility, as we wrote earlier in the week on Mindful Money, are all short-term noise. Long-term investors should be asking whether their asset mix is suitable for the coming decades as unless you are an obsessive day trader – or work for an investment bank – these short-term moves won't make much difference.

After all, attempting to time the market and bail out whenever you see stormy waters is very difficult – and exhausting in the current climate. Investors who make piles of money over time, such as the Warren Buffett's of this world, have a long-term outlook and expect peaks and troughs along the way. 

If anything, recent market action has once again highlighted the critical importance of diversification.

The danger of human behaviour

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