The question I am being asked most in charity investment committee meetings at the moment is "when should we sell?" After the strong returns experienced by investors over the past few years, this is understandable, particularly for those charities that have plans to spend the gains on charitable activities in the next few years.
However, many charities are investing for the long term, so the question they are asking is not as simple to answer as it might seem. For these investors, not only do we need to consider selling at the right moment, but we’ll also need to buy back at an opportune time. So is that possible? Whose decision is it: the charity investment committee's or the investment manager's?
Let’s look at some evidence on market timing. With the benefit of hindsight, market timing seems easy. We should sell when the market is high and we should buy when the market is low. Simple? Unfortunately, it’s not. The data suggests that attempting to time the market might hurt more – in financial and opportunity cost – than benefit.
The US market research firm Dalbar releases an annual report called Quantitative Analysis of Investor Behaviour, which quantifies the gap between the returns on the US market and the returns to the investor. Over the past 30 years, the US equity market has returned 10 per cent a year, whereas the return to investors has been only 4 per cent. This differential is staggering, even when you factor into the equation that the average US equity fund has lagged the index over this period. It suggests that the "average investor" is very bad at market timing. Although we can all look at a chart and imagine what we’ll do when markets are low and when they have performed well, in fact the emotions of fear and greed lead towards the exact opposite reaction.
So investors must try to protect themselves from these behavioural biases. Governance structures help, as does setting realistic expectations. The UK market has fallen by at least 10 per cent for some period in 24 of the past 30 years. In only nine of those years was the end result negative. In other words, oscillations in values are normal and to be expected. Most of the time, the worst possible thing for an investment committee to have done would have been to sell after a 10 per cent fall and crystallise the loss. Over the past eight years, post crisis, the UK equity market has returned 15 per cent a year. If you were to miss only the best 20 days each year, your return would have been 4 per cent.
These statistics all support my healthy suspicion of anyone that claims to be able to market time. Although I believe in asset allocation, by which I mean tilting portfolios towards assets that look fundamentally better value than other assets, I find it hard to be confident enough in my ability to time the market. For clients with short-term spending needs, or who are happy to have cash in the bank for risk reduction, then now might well be a good time to realise some profits. But for long-term investors who want to sell and reinvest, I am sceptical of any significant moves to cash: even if we get it right, selling at the top on the way out, we’re unlikely to be able to call the bottom precisely.
Kate Rogers is head of policy at Cazenove Charities