One of the main problems we face in the world of investing is the precise moment in which we should invest.
I am going to talk about the problems that many investors have when choosing different strategies available in the market.
This is a very common thing in the financial markets and the quantity of strategies we can find is huge.
Before, it was common to see these problems mainly related to investing in funds.
Nowadays, with the advent of internet trading it has become much more democratized and popular, having thousands of alternatives to invest in, whether it is in futures systems, social trading, or Forex signals.
Some of the most popular in this respect are Darwinex, Zulutrade or eToro, among others.
The possibilities are endless.
However, all of them have something in common, especially when attracting new investors.
Investing with experts?
This is what we could call the “Rumasa effect”.
Rumasa was a very popular Spanish company that issued corporate bonds at 7% yield years ago and advertised it on some mainstream TV.
The amount of interested investors was huge, and many of them bought the bonds.
Eventually the company went bankrupt and they lost their investment.
This “Rumasa effect” is the fact that the potential investors always try to invest in the best asset in the market.
That is logical and normal, only if the investors chose a good moment to do so.
If investors looked in the real long-term, namely centuries, they would invest in stocks, for sure.
If they looked in decades, they would probably do the same.
If they measure profitability in a couple of years, things change, however.
If you measure the profitability in a couple of months you can find anything in the market.
The most basic example of this kind of investing is the next one:
Let us assume we are an investor looking for a good strategy to invest in and we find the strategy X in the broker Y.
The graph is actually the DAX30 but we just think it is “Strategy X”.
Well, the investor searches the best strategies available in the provider Y and sees that Strategy X has won more than 30% in a year.
Imagine that the alternatives are dire, like a world with 0% interest rates.
A lot of people would buy that supposedly great strategy hoping to win 30% the next year.
What is more, many investors will think that these types of strategies are those which win 30% annually or more.
The investor decides to buy X when it is trading at 7,400 and is very happy to do so.
After some months the strategy does not go anywhere.
Hopefully, the investor thinks it is just a stop before resuming its gains.
However, some months later he realizes that the strategy X behaves very badly and starts falling very rapidly.
If the investor has a sizeable amount of money for sure there will be a lot of pressure to take the money back, especially in those moments when there is fear in the markets.
Some bad news, some pessimism and many investors cannot help themselves and usually sell their investments.
What went wrong?
How is it possible that such a good strategy and so promoted by the broker, experts or analyst has ended up so badly?
Well, the stock market is like that.
It is a very difficult world.
That is why it is always safer being a contrarian.
What does it mean?
It does not mean betting against the best assets, as you may think.
What it means is that you should buy the best assets especially when they have a correction.
In other words, it is better for us to buy with some advantage.
What happened later, after the investor exited Strategy X?
Well, this strategy got better and ended up rising 100% in a couple of years.
Even if we think this is quite a silly, it happens all the time in the markets, to investors of all sizes.
Everybody wants to beat the market, fair enough.
Who does not?
Nonetheless, you cannot beat the market all the time.
If, for example, we see an interesting Forex strategy which has won 30% in the last 6 months, I can almost guarantee you that it will probably not be the best moment to invest in that strategy.
In the majority of cases it will be better to wait until some correction happens.
Believe me; I have seen this a thousand times.
For example, we have the cases of social trading platforms where there are lots of “good strategies” that are very popular.
People see the return and think it is the best moment to buy.
Greed rules in those moments.
They buy and after six months, when the market has fallen a 20%, sell desperately, completely disappointed.
After the seventh month, the market resumes its previos trend and the investors look at it in despair.
The masses and the problem of investing with the experts
We have many examples of people who tell you that you will make 20% every month, or more.
Obviously it will not be the case in reality.
You may buy and win 30%, but lose 20 the next month.
There are not systems that give profits constantly.
That only exists temporarily or in the worlds of fantasy of some people.