Investing involves risk. In some cases, risk can be reduced by timing the market instead of jumping in blind.
If jumping blind – basically investing without doing any research at all - is ever acceptable it’s when the stakes aren’t too high, a bad outcome won’t impact negatively on your lifestyle, and you’re buying a very plain investment. And even then, what sensible investor wouldn’t take some measure of risk before diving in?
A step up is attempting to ‘time the market’. This could be the right move to make if you have a deep understanding of the asset and its behaviours (and the right digital tools to analyse the investment you’re buying).
But this, too, is riddled with flaws.
Here are four reasons timing the market often backfires. I write this fully aware that there are a minority of folk out there who can time the market with a degree of accuracy, but they are a minority!
This might seem like a bold claim. Let’s break down the statement further by comparing speculating and investing.
To distinguish speculators from investors, it’s important to look at their attitudes toward research. Speculation is about forecasting – guessing - market fluctuations. In other words, timingis key.
On the flipside, though, an investor isn’t swayed by trends, rumours, or hearsay. Their priority is to buy and hold investments. Does this mean changes in market sentiment are unimportant to them? Not at all. Opinions drive prices up and down – at which point, you sell or buy, depending.
But an investor bases that decision on whether price movements have made the asset cheap or expensive compared to its ability to make money in future; not price alone. Timing the market can make you sell great investments, or buy poor ones, without knowing it.
2. Everyone wants to prove the system wrong
As human beings, we’re addicted to beating the odds. Social media is an example. People get a dopamine hit when engagement on one of their posts skyrockets. The opposite is also true, though. Despondency when your content disappears into the digital dustbin.
We hate losing more than we love winning.
And to ‘win’, surely, we need to beat the system? Which means going against the grain, even if our rationality tells us we shouldn’t. But we are overconfident, or prone to believing we’re due a win after a series of losses, which probably explains why calling turning points is appealing.
You’re the one who knows what the rest of the market doesn’t. Your charting technique gets you closer to the turning point than others, right?
3. Do you really want to dilute the power of compounding?
Think of compounding as a snowball that grows as it rolls down a hill.
In other words, returns generate returns, which make more returns, and on and on. This is the true power of investing: committing to the long game instead of reflexively buying or selling in response to trends or rumours. This is trading.
Trading generally isn’t a shortcut to wealth, but better suits people who thrive on beating the system, yet it isn’t far removed from pure speculation.
Compounding, on the other hand, is manna from heaven for investors with no interest in outwitting the market in the short term and instead want to sit back and watch their investments steadily grow.
Will you get rich overnight by investing and waiting for the compounding to kick in? No, but you put the odds in your favour the longer you hold.
4. Want to miss the best days? Then time the market
Plunging stock markets can send people into panicked spirals that condemn them to sell prematurely.
The mentality behind this is to protect their investment before it loses money or noticeably depreciates. This kneejerk response, while logical in an evolutionary sense, is flawed.
In these days of electronic trading, algorithms and the rapid spread of information, prices have already tanked long before most of the herd have got out. The damage is done.
Moreover, panic selling dramatically reduces long term returns investors might otherwise have enjoyed had they dug their heels in. It can take over 1,000 days to recoup losses in a bear market, making it difficult to hold your nerve and put off pressing that in-built panic button which is telling you to sell.
How do we know missing the best days hits you in the pocket?
Bank of America studied the S&P500 from 1930 to 2020. Investors who tried to outsmart the market and missed the 10 best days each decade would have made 28%. Holding steady throughout bagged you 17,715%! That’s 196% a year compared to 0.3% (how much are we getting in the bank, again?).
Does the thought of watching the market and making fast decisions based on constantly changing data which you can’t reliably predict and act ahead of worry you?
Then this means you’re more suited as an investor rather than a trader or speculator. There are successful traders, of course, but investing carries a far more reliable chance of making money and is in my view far more suitable for non-professional investors.
Perhaps it’s time to put away the charts and pick and stick with great investments instead.
Great investments being those with a solid financial foundation (does it make money, consistently, in most conditions?), an attractive future (will the world of tomorrow need it?), and where the potential returns compensate you for the risks.
Sometimes, the best solution is to talk to an expert instead of going it alone. Talking to me won’t cost you a thing but could prove a valuable investment of your time in the longer term.
Contact me to book a free meeting and let’s get to know one another.