Not Again, Please!

Once again I want to discuss this idea of timing the market or time in the market. On Thursday we released our first Masterclass Podcast, Stocks V Property.

SPECIAL: Stocks vs Property (youtube.com)

Yes, it’s a tired subject but we wanted to bring a different point of view to the debate. When you invest in anything, you need to understand the underlying characteristics of each investment. All investments have risk, stocks have higher volatility than property or bonds, but property can use more leverage, but bonds have liquidity.

Like my answer to most investing questions is - “it depends” and so it doesn’t have to be a choice. While having a bad reputation, timing the market is a better approach simply because all investing is essentially about time.

And that is the main point we wanted to get across. It is never “stocks are always best” or “property is always best”. So……it depends.

If you buy cheap when the market has crashed (note past tense), then you can probably sit with ”time in the market”, because of the specific circumstances surrounding when and what you bought. But note that is more timing the market.

If you bought cheaply, then your compound return will most likely be above the long-term average and so holding works because the starting expected return or the total yield is excellent. Why would you sell if an investment whether stocks or property is compounding at, say, 10% per year.

Why would you apply “timing the market” if you buy like Warren Buffett only when stocks are on sale.

Like a supermarket, each week there are some specials, but many items remain expensive or at least not a bargain. But when the supermarkets discount all prices then that is a pretty good time to dive in and load up. As Buffett says when it’s raining opportunities “reach for a bucket not a thimble”.

Now part of the problem with property is that it requires leverage on most cases and at some point, the bank says no to your request to “load up”. However, you can be compensated because even buying one investment property at $1,000,000 which compounds at 10% a year is a great investment especially if you only used $200,000 of your own money. A disadvantage is the inability to rebalance and take partial profits like you can with stocks. But if you have bought at a market bottom and you can handle the repayments, then there is little reason to worry about rebalancing.

And this is the point.

It’s not about stocks or property, it is about the characteristics of each investment class. Stocks have an advantage that you can rebalance and still retain some holdings. Buffett sold 50% of his Apple stock for an absolutely huge profit but still retains a sizeable share of it in his portfolio.

While you can’t do that with property, you can take advantage of leverage especially when rates are low, and property is cheap to make the equivalent return. It has less liquidity, but also lower volatility.

But one thing is for sure.

If you buy when assets are cheap and sell them when they are overpriced, then you have discovered the secret formula.

Timing the market and time in the market are two sides of the same coin.

So stocks or property?

It depends.