Investing Shares

Should You Be Trading The Dips?

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The mind boggles at the amount of commentary around the recent market pullback. This is not a bad thing, we should be aware of what is happening on global share markets as this is often an indicator of the health of global economies.

The concerning thing about this commentary is that there is no shortage of pundits, economists and so called investment commentators saying the best course of action is to be trading the dip.

The Trend is Your Friend (It Doesn’t End Until it Bends)

Unbeknownst to many part-time investors, some parts of our share market have been in solid downtrends for quite some time. Consider that the Australian resource sector has been in a downtrend for the last 5 years, with no sign of slowing.

QRE ETF Performance

In this situation a ‘buy the dip’ mentality is nothing more than a hospital pass. Markets move in trends and it is best not to fight the prevailing trend. Sure there is plenty of value in the resource sector, you can buy BHP at 2009 levels, but why would you willingly stand in front of the trending freight train?

It reminds me of the famous quote from British economist John Maynard Keynes who, unlike most economist, was actually a great investor:

‘Markets can remain irrational longer than you can remain solvent.’

 

How to Invest Successfully

I don’t know about you but I would rather follow the advice of star investors like George Soros, Warren Buffett, Ray Dalio or Paul Tudor Jones and one of the traits they all shares is to look for asymmetric investment opportunities. Good investors know that they won’t get 100% of their investment calls right, so they try and limit and keep their losses small and let their winners go.

An example of an asymmetric investment opportunity is one that has the potential for multiples of their money on the upside and limited downside, say 4:1 or something like that. Most good investors don’t get out of bed in the morning for anything less.

The moral of the story here is that if you want to be a successful investor, you should be looking for asymmetric investment returns.  

Duration of Bull Markets

Considering the rally of markets since 2009, the asymmetric nature of our return profile has shifted.

Based on our analysis of historical market cycles, the median bull market will rally 97% from the market low over a period of 114 weeks.

The current bull market rally in the US is just about to reach a return of 300% and a duration of 312 weeks. Based on historical market cycles there is no doubt that the probability of asymmetric returns is not in our favour.  

The Bottom Line

A good investor takes a long term view. A speculator blindly buys the dip.

Just as we only realize our insignificance when we see a picture of the earth from space, the same applies to investment markets. Take a step back and look at the larger cycles in action.

World From Space

Global stock markets move in cycles that are larger than ourselves, so zoom out, take a step back and see the bigger picture.

Don’t rely on investment pundits, listen to your own intuition, protect your downside and let your winners run.

The Wealth Guy Signature

Joshua Stega

The Wealth Guy

Joshua Stega is an expert financial adviser and founder of JAS Wealth in Sydney. He specialises in the habits and behaviours of wealth. Joshua has a Masters in Taxation and Financial Planning and is regularly featured in the media

M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you.

 

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