The Risks of Market Timing; The importance of never giving up
Remember why you started
If you’re like most investors, you started your financial plan with the intent of achieving any number of goals. Some were short-term like buying a house, while others had longer time horizons, such as enjoying a comfortable retirement, sending your kids to college or buying a second home.
Over the years, you’ve probably invested in stocks and bonds in an effort to steadily build and preserve your wealth over the decades to come. Your long-term strategy did not include trying to jump in and out of the market based on its short- term performance.
Brief, explosive spurts of market volatility (both positive and negative) are the norm, but an impulsive investor who abandons the market during one or more of its sharp downturns, may miss the strong, ensuing rebounds.
Understand the risks
While many investors worry about market risk, company risk, interest rate risk, inflation risk or credit risk, what it all really boils down to is the risk of losing money.
For most, losing money evokes a powerful, visceral reaction — so much so that some investors turn
to market timing or the buying and selling of a security based on future predictions. But choosing when to invest is extremely difficult as those who are tempted to try and time the market may run the risk of missing periods of exceptional returns.
While market movement is difficult to predict, there are a number of potential catalysts that could point to a more positive direction, and missing that move could be costly.
The Problem with Market Timing: Missing the Best Days
Using the S&P 500 as a proxy for the domestic equity market, and looking at a 20-year investment period, we see that:
- If an investor missed just the 10 best days, almost 40% of the gains would be lost.
- If they missed the 20 best days, about two-thirds of the gains are gone.
- Missing 40 best days resulted in a loss.
If market volatility isn’t managed properly, market timing can seriously impact long-term performance. On the other hand, volatility provides investors
the opportunity to buy stocks and mutual funds at attractive prices. So you can never underestimate the value of market timing.
Nobody starts a marathon expecting it to be easy
No matter how hard you train and how many injuries you may sustain, it’s important to pick yourself up and keep going.
It’s the same with investing — over long periods of time, the financial markets can be remarkably steady, but in the short run, sharp spikes in securities prices can be the norm.
This volatility suggests the market can’t seem to make up its mind, which triggers a potentially difficult journey for investors. Many may be tempted to pull out and wait for the market to regain its footing.
But moving assets from your current portfolio to what you think is a more stable investment may be a mistake. Amid uncertainty, you need to keep your cool and avoid making potentially costly decisions based on a knee-jerk reaction
As financial professionals, LDN Wealth are committed to…
- Providing you with a historical perspective on the financial markets so you can get more comfortable when the markets become volatile
- Guiding you through fluctuating market conditions and helping you make prudent decisions regardless of prevailing conditions
- Helping you maintain a custom investment strategy that supports your personal financial goals and time horizons
Contact LDN Wealth today for more information on how we can help you stay on track in pursuing your goals.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.