“Hey, is it better to be in cash than shares right now? Dad has just cashed up all his shares till this blows over …” That was the phone call from a friend of mine during the week. There is an answer but it might not be what you were expecting …

For nearly 20 years now we have enjoyed clear inflationary skies, and since 2003 the warming rays of a delightful share market, too. We relax and enjoy the sunshine.

Not any more.

If the bitter bite of that winter wind causes you to look up, you’ll see dark, dark clouds. The media is writhing in ecstasy -- it’s been waiting for years to use the term “the perfect storm”. In the circumstances they could be forgiven; over the last 12 months we have witnessed …

• interest rates rise 4 times,
• petrol increase 20% in just 12 weeks, during the June quarter,
• the cost of vegetables rise 9.7%, milk 11.6%, and bread 9%1 during the March quarter, and
• the share market drop nearly 30% since November.

The banks have been savaged, investors are losing huge dollars in failed investment companies, and the property market is rooted to the spot like a bunny in the headlights.

Many commentators are creating doubt that the system will ever recover, with slogans like “things have changed forever”, and “the fundamentals no longer work”.

Consider this gloomy epitaph:

"This time it is different. This time the market won't be so quick to bounce back. . . . Who can look at the world right now and not conclude that things have changed dramatically?"

This was not uttered last week, but a decade ago, after the crash of ’872.

Back on that day in October 1987 an investor wholly exposed to Australian shares lost over 40% of their money. However a year later their portfolio had recovered 90% of its losses 8%.

Fast forward to early 2003. The media forecasted that shares and property are to be avoided at all costs because they’re overpriced and just about to drop like an overripe fruit. Investors who followed this prediction missed the best bull market of the decade.

Citigroup estimates nervous Australian investors have amassed a cash pile of $170 billion from money that would otherwise have flowed into share markets3. What are they waiting for – for markets to be expensive again?

It gets worse: financial planners who should know better are actually encouraging this market timing approach. “We are not seeing a great deal of value at the moment,” confirmed one financial planning firm’s ‘investment analyst’. He said their planners have advised clients to wait for a correction in coal and oil shares before buying into them4.

Scanning the newspapers and news reports, every fund manager and bank economist has an opinion on where the world is headed. The truth is that nobody knows what the future is for the business cycle. What we do know, though, is that on many, many occasions in the past we have been confronted by ‘unprecedented’ events. It’s at times like this that our discipline is sorely tested.

If you do sell everything up and sit in cash, be assured, the clouds aren’t going to part and a divine voice call you, saying “Now, buy now!” If you’re not in your seat you’ll miss that ‘hockey stick’-turnaround day.

Timing the markets is extremely dangerous because the cost of getting the timing wrong is huge …

*click image for larger version

You can see on this chart that $1000 invested in blue chips5 in June ’92 would be worth $5670 if it had simply been left to do its job. However if the investor lost their mettle and pulled the money out, only to have missed that ‘best day’ then their portfolio would be worth just $5285.

To be uninvested and miss the five best days means their portfolio would be watered down to $4,603. If pulling your money out is an annual event and you’re skilled enough to miss the best day each year during this period, you’d be left with a paltry $2,572.

These returns are yours. You’re entitled to them. There is no clever buying and selling or canny second-guessing the market. They are there for the taking … provided you’re in your seat.

But if you are terrified at the prospect of your share or property investment being worth less this time next year, then you ought to be wondering why you’re invested in them at all.

Risk is the reason why you get returns, not something to be avoided.

---