We all want to make the biggest returns on our investments, but trying to identify the perfect opportunity or “timing the market” may result in you making less money or even losing some of your capital.
We’ve all heard the analogy of buying low and selling high, but focussing on identifying a high or low of a market stock can leave the investor confused about when to place his/her money into the market.
Your research (or even worse instinct) might say that a stock has now reached rock bottom and now is the time to buy, but life has no guarantees and the stock might go even lower and vice versa.
The concept of timing the market comes with several risks, which this article aims to unpack.
Timing the market during volatility
A volatile market can be seen as the tendency of a market or security to rise or fall sharply within a short period of time. Market Volatility can cause investors to panic and make emotional decisions; selling a stock at a market decline leaving them with little to no returns or even a loss of partial investment capital.
Attempting to time markets can also mean that an investor attempts to stay in stock as long as possible before a market declines, but there is always a possibility of selling those stocks too late and ending up again losing returns.
Staying out of the market
Deciding to sell stocks in a market decline can cause the investor to miss the upswing of stock and the returns that go with it. A previous research study done by the Dalbar firm has shown that investors in the equity market who sold their stock in the 2011 volatile market made a loss of over 5% while investors who remained invested made a gain of 2,12%.
The risk of being emotional
If an investor loses money after selling a stock during a decline he might feel the pressure to make back his earnings by buying a stock which is on an incline, which means he is overpaying for a stock. Creating a downward spiral of buying high and selling low.
Previous studies have shown that; bad timing decisions or procrastination have proven to provide returns more than 10% less than if you had remained invested.
“The Stock Market is designed to transfer money from the Active to the Patient.” – Warren Buffett
Trading often, leads to more costs
By constantly trying to time markets, selling and buying at stages the investor feels it is the “right time” adds costs to the bottom line, such as capital gains tax. The short term 2016 Capital Gains Tax Rate is over 20%, but If you can manage to hold your stocks for longer than a year, you can benefit from a reduced tax rate on your profits.
Advantage of being disciplined
“Time in the market” has shown to be a much more effective strategy than “timing the market”. With a simple buy and hold strategy past studies have shown that returns can be reasonable despite the volatility of short-term periods.
Doing the necessary research to identify investments that meet your personal needs according to your time horizon will help keep you disciplined because an effective strategy would have considered volatility. For example, research has shown that asset classes like shares (equity) beat inflation 100% of the time since 1900’s by a spectacular factor of 8+.
To do this goes beyond watching the news or skimming through the paper, it requires a constant, in-depth analysis of the market, which most of us do not have the time, skill, or inclination to do. My opinion is to leave it to the professionals, Stringfellow Investment Specialists have been recognised as one of the best investment managers in the country and as such you could use their services knowing that your finances are taken care of.