Common to all investment styles should be an overall game plan, which incorporates clear criteria for stock selection and a disciplined monitoring process.
However, as investing in equities is not an exact science, not all private investors will utilise the same approach when choosing shares. As a case in point, the primary focus of an investment strategy need not be stock selection.
As well as concentrating on specific companies, an investor may consider the additional impact of macro-economic and political influences on the outlook for equities, and consequently endeavour to add value by tactically moving in and out of markets.
Embodied in this strategy is a recognition that market movements are not solely a function of stock-specific information.
Rather, broader factors such as interest rates, economic forecasts and political surprises will affect performance.
For example, over the duration of Sharetrack, global equity markets have generally been constrained by the possibility of an interest rate increase in the US, signs of continued economic difficulties in Britain and a loss of confidence in the new euro currency. As a Sharetrack investor, given such uncertainties, the temptation maybe to liquidate your equity holdings and temporarily move your proceeds into the safe haven of cash deposits.
Yet, while everyone aspires to sell at the top of the market and buy at the bottom, the perfection of market timing over the longer term has proven particularly difficult.
Staying out of the market, on the expectation of lower prices, can yield significant detrimental repercussions for portfolio performance.
For example, if you remained fully invested in the US market over the past 10 years, you would have earned an annual return of 16.8 per cent per annum.
This would have fallen to 12.8 per cent if you had missed the 10 best performing days and 5.7 per cent if you had failed to be invested for the 30 days when the market recorded highest gains.
Therefore, one could argue that, over the long haul, staying out of the market carries greater risk than remaining fully invested.
However, given the short time frame of Sharetrack, the merits of divesting some of your equities cannot be ruled out.
The question remains - is this the time for a cash call?
Laura DeVoy is a researcher in the private client department of Goodbody Stockbrokers.
