Mary Holm: Timing really isn't everything

Q: Mary, you say some rich people have a reluctance to acknowledge how luck has helped people get rich. I concur, as in many cases it is pure timing. Being in the right place at the right time to launch your product.

In life "timing is everything" as my screen saver at work said. Timing to get that perfect job, ideal partner, desired promotion, rewarding investment or even just staying alive by not being in the wrong place at the wrong time when that speeding hoon was coming towards you.

Timing you can assess in some way by studying trends, fashions, under-supplied niche markets and political direction.

Graham Hart got going by buying a government printer from a Treasury not skilled in selling, so he was even paid a partial refund before he sold it for a huge profit.

I once knew a skilled farmer who bought his first farm in Perth's wheat belt. He had the skills, machinery, size of property and money to survive the first two years but he bought in the first year of a seven-year drought, so he had no hope and went broke. Was it bad luck or bad timing?

A: In his case, clearly bad luck.

In some situations, research can certainly help us make timing decisions - such as when to start a business, apply for a job or "pop the question". (In the last case, the research might involve noticing what puts the loved one in a really good mood!) Obviously, though, we can't know when a seven-year drought is coming or a crazy driver is heading our way. And I would put timing of investments in the same category.

I've got a folder full of research that shows investors who try to buy low and sell high - timing the markets - are highly likely to do worse than those who buy and hold.

United States managed funds had an annual average return of 10 per cent over a recent 10-year period. But the average return of investors in the funds was just 2 per cent. They kept going into funds after they had done well and getting out after they did badly.

Another study showed that it doesn't matter all that much when you buy shares, if you invest for the long term.

Let's say an investor put $5000 a year into a New Zealand share index fund over a 30-year period, always reinvesting dividends. And he always did it on the last day of a month - just because that's the data that were available.

If he were extraordinarily lucky and invested $5000 each year in the month when share prices were lowest, he would accumulate $2.08 million before tax.

If he were extraordinarily unlucky and always invested in the month when prices were highest, he would accumulate $1.65 million.

If he simply invested one twelfth each month, he would accumulate $1.85 million.

The numbers are exaggerated because we make no allowance for tax. Even so, given that the total investment was just $150,000, even half the growth in any of the scenarios would be impressive.

But my main point is that good or bad luck with timing doesn't make as much difference as most people would expect. And, given that it's impossible to know which month will be best, you can do almost as well by steadily investing your money regardless of what the markets are doing.

This, of course, applies much more to long-term investing than short term. But wise share investors, such as Warren Buffett, the world's second richest man, are in for the long haul.

One more item from my folder: When US analyst Elaine Garzarelli predicted the October 1987 crash just four days before it happened, Business Week called it the "call of the century", says a PriceWaterhouseCoopers newsletter. But between 1987 and 1996, she made 13 calls that the sharemarket would rise or fall. She was right five times - "worse than if she had flipped a coin".

The moral of these stories: Don't try to time markets.

Q: Re your past few weeks' comments on "luck", isn't luck where opportunity and preparation collide?

A: What a lovely succinct way of putting it - except, as we've just discussed, in situations in which preparation does you no good.