In this series of posts we're looking in detail at 7 of the most common mistakes that investors make. In this post, we'll be looking at mistake number 4, 'Concentrating too much on fundamentals' and mistake number 5, 'Playing ‘buy and hold'.
If you would like to know more about this and other investing mistakes to avoid, please just download our free report The 7 Biggest Mistakes That Investors Make.
Mistake number 4: Concentrating too much on fundamentals
Did you know that the market is forward-looking? True, and this means if you are looking at news headlines and economic indicators to guide you, you may find those signs appearing about six months too late. The economy only recently gave signs that the global recovery has taken hold. However, if you had sat on your hands over the last five years, you would have missed out on the potential to have made some attractive returns. For example*, the FTSE 100 returned each year on average 8.8% and we did even better, returning 14.5% per year.
*December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.
We cannot stress enough that we have nothing against looking at fundamentals. However, where many investors go wrong is when they avoid looking at the technical side of the market. In the stock market, technical analysis is the study of the market itself, separate from fundamental analysis, which focuses on a company's or country’s financial condition. Technical analysts typically use price and volume charts, looking for patterns that suggest future behaviour.
Did you know that approximately 75% of the market’s movement comes from institutional investors? It’s true, institutional investors have the largest influence on the market’s future direction. If these huge investors are buying, smaller investors like you and us can jump onto their coat-tails. And if these institutional investors are selling, we can quickly switch out onto the sidelines. We use price and volume charts to help us see what institutional investors are doing, allowing the opportunity to follow in their footsteps.
If trading volume is above average and price action is up, institutional investors are buying. That’s good. On the other hand, if volume is above average and price action is down, it means institutional investors are selling. That’s not good. If volume is below average and the price action is up, it indicates little demand from institutional investors. That’s also not good.
And finally, if volume is below average and the price action is down, it indicates that institutional investors are reluctant to sell. This type of action is good. By watching the market every day, and keeping a close eye on price and volume activity, you can slowly determine exactly what institutional investors are doing with their money – effectively allowing you to get in sync and trade with the market’s trend, instead of against it.
Mistake number 5: Playing ‘buy and hold’
It is easy for investors to believe that the best investment strategy is a passive buy‐and‐hold approach. The mantra goes, ‘It’s time in the market, not market timing’. Buy and hold can be an extremely effective approach, especially if you start at the right time and buy when the market is low. However, it is an approach that comes with flaws. Buy and hold only tends to work in long trending up markets, such as the super bull market that occurred between 1980 and the year 2000.
In our opinion, a better strategy would be to aim to time the market. This is extremely difficult to do and of course, you are never going to get it right every time. The timing method we use is far from perfect but we are proud that it’s a method that has managed to catch the start of every single bull market in the last 50 years. The way we aim to catch the start of bull markets and spot market tops is to analyse the trend of the market by watching the price and volume action of the four main US stock market indexes.
We look at price and volume action on charts because it helps us track the investment behaviour of institutional investors, helping us to get in sync with their trading activity. In other words, we want to trade with their money flow, not against it. Instead of playing buy and hold and trying to guess the best time to buy, we wait for the price and volume activity to confirm that a new bull market has begun.
We then aim to accurately move into the market by buying a quality investment fund. After the bull market has run its course a new bear market begins. And after the bear market ends, a new bull market begins. Bull markets generally last two to four years and so, when we believe the bull has run its course, we become more defensive and may move completely out of the market into the safety of cash. When we believe a major downtrend has been triggered, we move completely into cash. We then simply wait patiently for a new bull market to start. Bear markets tend to last nine to eighteen months and so they are much shorter than bull markets.
Remember, if you would like to know more, please just download our free report The 7 Biggest Mistakes That Investors Make.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO specialises in ISA and SIPP Investment and is the pioneer of ‘Shadow Investment’; an easy way to grow your ISA and SIPP at low cost. Together with our clients, we have an estimated £57 million actively invested in ISAs and pensions**. Clients like us because we have a great track record of ‘beating’ the FTSE 100***. Over the last 16 years, we’ve outperformed the Footsie by 60.2% and over the last 5 years, we’ve averaged 14.5% each year versus the FTSE 100’s 8.8%. You can find us at www.ISACO.co.uk.
What is Shadow Investment?
Picking the right fund for your ISA and SIPP is not exactly the easiest job in the world. And knowing 'when' to buy and 'when' to exit is even more difficult! Our ‘Shadow Investment’ Service is here to help. Our service allows you to look over our shoulder and buy the same funds that we are buying.
When we are thinking of buying a fund, we alert you so that you have the opportunity to buy it on the same day that we buy it. We also tell you about when we are planning to exit the fund. You control your investment account, not us. You can start small and invest as little or as much money as you like.
By knowing what we are buying, when we are buying and when we are exiting, throughout the year you can mirror our movements and in effect replicate our trades. This means you have the opportunity to benefit from exactly the same investment returns that we get. Our investment aims are 10–12% per year.
We are totally independent, fully transparent and FCA compliant. We’re warm, friendly and highly responsive and it’s a very personal service that gives you direct access to the Sutherland brothers; ISACO’s two founders.
Who are ISACO’s clients?
Clients who benefit most from our service have over £250,000 actively invested and the majority of them are wealthy retirees, business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector, such as IFAs and wealth managers.
Do you have questions?
To have all your questions answered, call 0800 170 7750 or email us at: info@ISACO.co.uk.
**November 15th 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
***Long-term performance: December 31st 1997 - December 31st 2013 ISACO 91.3%, FTSE 100 31.1%. 5 year performance: December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.