Mark Mobius is the executive chairman of Templeton Emerging Markets Group. He recounts that day he attended a conference in Canada with the late John Templeton. He was asked by a young lady in the audience: “I’ve just inherited some money from my grandfather. When is the best time for me to invest it?” Templeton replied: “Young lady, the best time to invest is when you have money.” Why is this a good answer? Because nobody rings a bell when there is a buying opportunity. In fact, the opposite is usually the case.
Investing during a bear market is easier said than done, and I readily admit it’s psychologically a very difficult thing to do. It requires you to look beyond the immediate bad news and toward a potential future recovery. If all your friends and neighbors are giving up on their stock market investments, it’s very easy to be swayed to do the same. In the realm of behavioral economics this is called “herding.”
If the newspapers are reporting how dire the market is and how it will get worse, you can also become subject to what we call the “whipsaw” effect – buying and selling at the wrong times. This is what happened when many sold in a panic at the bottom of the market during the US subprime crisis in late 2008 and early 2009. Then, after the market moved up by over 50%, many decided that they were missing the boat and had to get into the market, buying at the market top! If you are engaging in this type of behavior, you are almost certain to lose money. Without a long-term view you just aren’t likely to be able to have the discipline to continue investing in a bear market and wait for the potential upturn.
What is one of the other “secrets” to investing success?
Diversification
So if you’ve got money to invest, and are taking a long-term view and thus not hung up on timing the market, how and where do you invest it? Another simple answer: diversify. We’ve all heard about people who made fortunes by investing in one company, but that’s not common. It reminds me of the saying, “If you want to keep all your eggs in one basket, you had better watch that basket carefully!” Most of us don’t have the capability or time to constantly monitor companies, and even professional investors realize that if they are not actually controlling the company in which they invest, some unknown or unexpected event can wipe them out. While diversification doesn’t guarantee a profit or protect against loss, it can potentially help mitigate some volatility.
I think it’s important to be diversified not only across different companies, but across different industries and, most importantly, across different countries. One reason why professionally managed strategies are so popular globally is because they enable investors to be well-diversified and have a variety of stocks that they probably couldn’t properly research and invest in themselves. Unfortunately, many investors have portfolios that invest in only one country… their own. I see this as a big mistake because they are missing out on potential opportunities all over the globe, which is the job of my team and I to uncover.
If time in the market – rather than timing the market – is key, and diversification adds to the chances for success, how can the average investor increase his chances even more? Get professional help to overcome the psychological tendency to follow the herd, and rely on the expertise of professional investment managers to create truly globally diversified portfolios.
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