At ISACO, our aim is to strategically time the market, which means instead of using a 'buy and hold' strategy, we are more active.
In this post we'll look at why getting in sync with the market is key to achieving the best ISA growth.
The reason we eschew 'buy and hold' is because it can often be a flawed strategy especially if you start at the wrong time. That's why it's important for successful ISA management to be in sync with the market.
For example in 1999, the stock market was seriously roaring. We’d just experienced almost a twenty year bull market and even though over that twin decade we witnessed some bear markets, 1980 to 2000 was a strong 20 year upwards trend.
At the end of 1999 many small investors who didn’t how the market works were unfortunately investing right at the market top. This group of investors had been wrongly told by their advisers that 'buy and hold' works. When we look at what’s happened since then we know that over the last decade investors have experienced the great bear market of 2000-2002 and the horrible bear market of 2007-2009.
Two severe bear markets
This means we’ve had two very severe bear markets in the last decade. That’s not good news for 'buy and hold' investors who bought at the wrong time. These investors who bought at the top of the market in 1999 and held will still be in a loss. Yes, zero growth in last twelve years. The lesson here is when people buy at the wrong time, as most people do, it can be disastrous. Is it a wonder that many private investors lose faith with financial advisers?
This is why it may be a better idea to think about learning how to strategically time the market for the best ISA growth. The timing method ISACO and our clients use is not perfect but it does help us to get it right about 80% of the time. What we know is it’s impossible to get in right at the bottom of the market and it’s impossible to get out right at the top. The method we use to time the market has managed to catch the start of every single bull market in the last 50 years. The approach we use to catching the start of bull markets and spot market tops has been to analyze the trend of the market by watching the price and volume action of the four main US stock market indexes.
Looking at price and volume action on charts can play a part in helping you track the investment behaviour of institutional investors. In other words, it helps you see what institutional investors are doing with their money, helping you get in sync with their trading activity. Aim to trade with their money flow not against it.
Eight hundred pound gorillas
Institutional investors are the eight hundred pound gorilla investors such as banks, building societies and other financial institutions. This includes pension fund managers, hedge fund managers and insurance company fund managers. Institutional investors buy companies such as Microsoft, Cisco or Intel in huge amounts. In other words, they buy and sell millions of shares. This means institutional investors are not your small retail investor. It’s a fact that institutional investors are the people that control about 75% of the stock market’s future direction.
When institutional investors are buying or selling, you can see their level of buying or selling activity by looking at price and volume activity on a chart. When institutional investors are selling heavy, meaning volume of trade is much higher than average, it's not good for the market's health. In other words, institutional selling weakens the market. It’s like when a woodcutter takes a cut out of a tree, it’s going to make it weaker making it more likely to fall.
Sometimes you need to be defensive to secure the best ISA growth
When institutional investors sell, it’s often the time to become more defensive. When we see a lot of institutional selling in a short period of time, it can often force us out of the market and into the safety of cash. On the flip side when we see the market rise on heavy volume, it means we are seeing institutional buying. When institutional investors buy, it strengthens the market and makes it prone to future rises. If we see a lot of institutional buying in a short space of time, it tells us the people who control about 75% of the market's future direction are aggressively buying.
Daily analysis of institutional investor’s investment activity could therefore play a part in helping you spot the start of new bull markets and the beginning of new bear markets. When we believe a new bull market has started, we immediately start to search for quality investment funds to purchase in the pursuit of the best ISA growth. Once we’ve bought a fund or funds, we and our clients stay in the fund as long as it is beating the market.
Instead of playing 'buy and hold' and trying to guess the best time to buy, a more effective strategy might be to wait for the price and volume activity to confirm that a new bull market (uptrend) has begun. And once a bull market has been confirmed, you then look to buy a quality investment fund and stay invested in that fund as long as it is outperforming the market.
After the bull market has run its course a bear market (downtrend) begins. After the bear market ends a new bull market begins. This is a boom and bust repeated cycle. It has happened in the past and our belief is that it will continue to happen in the future. Bull markets generally last two to four years and so when the bull has run its course you'll want to quickly switch out of the market and into the safety of an ISA Cash Park.
If you're looking to get the best ISA growth, then I hope you've found this post helpful. As always, if you have any questions or thoughts on the points I've covered, please leave a comment below or connect with us @ISACO_ on Twitter.
Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.
ISACO was established in 2001 by brothers Stephen and Paul Sutherland and is the first financially regulated firm to offer adventurous ISA and SIPP investors a unique personal investment service that shares on a daily basis our star-performing investor’s thoughts, personal insights and investment decisions.
Clients enjoy being informed throughout the year what ‘best of breed’ funds our premier investor currently owns, when he’s buying and when he’s moving into the safe harbour of cash – helping clients enjoy more control, manage their portfolio more effectively and benefit from the potential of outstanding long-term returns.
For more information about ISACO and our Investment Guidance Service, please read our free brochure.