Investors are faced with the same emotional tug-of-war at every correction: Do I sell and abandon my positions or do I sit tight and ride out the storm? Here are a couple of useful perspectives:
What is your investment time frame?
Do you plan to invest for the long-term (5 to 10 years) or is your investment horizon a matter of months or weeks? If your investment horizon is long-term, you are investing for the primary trend. Your intention is unlikely to be to time secondary market movements.
Is timing secondary corrections profitable?
Our research shows that the average re-entry point, after brokerage and slippage is higher than the exit point and erodes performance.
Has the earning capacity of stocks you hold been affected by the correction?
A correction is a wave of negative sentiment, normally caused by an external shock — like the prospect of higher interest rates, oil prices, some new conflict or a threat to international trade. Where the market decides that earnings are unaffected and there is no permanent loss of value, it tends to recover fairly quickly. If, however, the market decides that there is a long-lasting effect on earnings then stocks are likely to be re-rated — resulting in a long-lasting drop in value. The probability of the former is far higher than the latter: the ratio of primary to secondary adjustments is low.
When is the best time to hold Momentum stocks?
We have not done a wide-ranging study of this, but the best two months performance for our ASX200 Prime Momentum strategy in the last two years were July 2013 (11.00%) and February 2014 (9.04%) — both in the middle of corrections.
Attempt to time the correction and you may miss the best-performing months.
