Standard Life and Market Timing

Last week I wrote about Standard Life (SL) and the principle of strategic ignorance.

 

Some readers have pointed out that strategic ignorance likely means that when markets plummet and top quality Dividend Aristocrats get sucked down and effectively go on sale, since you won’t be watching and waiting to jump in you can miss a huge opportunity to buy quality dividend machines on sale. This much is true; however it’s not quite so simple.

 

The true part is that the impact of market timing is substantial.

 

When I purchased SL on 19 April 2011 for 211.202 pence per share, using last year’s dividend of 13 pence per share, the yield would be 6.16% (13p / 211.202p). Based on last week’s closing SL share price of just over 223p per share Mia would have a paper capital gain of £29.50 (current value of £557.50 (223p per share X 250 shares) – £528 (purchase price of 211.202p per share X 250 shares)) and be looking forward to a 6.16% yield, assuming the dividend in 2011 is that same as 2010, though it is expected to grow.

 

However, had I purchased Mia’s 250 shares on 8 August for 172p per share then Mia would be sitting on a paper capital gain of £127.50 (current value of £557.50 – £430 (purchase price of 172p per share X 250 shares)) and a juicy yield of 7.56% (13p / 172p).

 

So clearly optimal timing would have produced both a larger paper capital gain buffer and a much greater yield all in a shorter period of time. Yet when it comes to reality, as I’ve discussed before, the future is unknown and unknowable. Had I known that SL would drop to 172p of course I would have waited. However, if instead SL had risen to say 240p per share, I’d now be kicking myself for not having bought in at the bargain price of 211p per share.

 

The point should be obvious.

 

In hindsight, there is always a best time to buy. Indeed buying almost any share or even an index tracker of almost any international market in March 2009 would have doubled your money in a year. The not so simple part is the reality that making this call is impossible. More to the point, when the panic sets in and the world is ending, such as the autumn of 2008, spring of 2009 or this past August, all but the most stoic and disciplined investors get flustered. And those who are ill-informed speculators, without a game plan, get slaughtered as they sell into a falling market (to savvy buyers) on the irrational fear that there is no bottom, just as they bought in at the top in the irrational belief that a rising market will never stop rising.

 

All research shows that market timing is difficult and although general trends are recognizable, calling absolute bottoms and tops is simply impossible. Those who do are not geniuses, they are lucky. For every high profile winner in the financial press there are untold thousands of everyday losers.

 

For the Child Millionaire portfolio, it’s long term compounding of rising dividends and pound / dollar cost averaging through regular purchases and dividend reinvestment that do the heavy lifting. So while we want to buy quality Dividend Aristocrats at a good price – the cheaper the better as the yield is higher – it’s the amout of time the share is held for and dividend reinvestment that are far more important than buying at the absolute bottom, a point which is never known until long after it has passed. The Child Millionaire approach is also a lot less stressful and leaves you with time to do other more interesting things with your kids than watch the gyrations of share prices.

 

All of this being said, everybody likes a sale and there are strategies for improving your overall chances of buying in at a good price that I’ll discuss in later postings.

 

 

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