Risks associated with timing the market
When we enter a bear market it is difficult to watch your portfolio go down in value and not make drastic changes to regain some control. But the reality is that this will cause more problems than it solves.
Plenty of research has shown that it is more beneficial for you to stay invested over the long term than attempt to time the market, unless you are a full-time day trader that is glued to the screen this strategy is unlikely to be fruitful
Market Timing
Attempting to trade in and out of the market (“market timing”) is a difficult strategy for many investors. A few traders have highlighted how they have made ill-timed decisions to buy into and sell out of markets, as the worst part of market timing usually occurs near market bottoms, and then getting back into the market occurs near market tops.
What will happen if you withdraw from your investments during a recession
Making a poor market move can significantly reduce the overall growth potential of a portfolio and investments. It is a natural bias “loss aversion” for most investors to want to do something to regain control of their assets. However, research suggests that taking a passive approach is preferable to making impulsive and speculative decisions. Although it is easier said than done, the key is to remove emotion from your investments to act rationally. The graph below demonstrates how investor’s emotions and the market potential, completely contradict one another
For these reasons, it’s important that individuals trust the caretaking of their portfolio to an adviser who is free of these cognitive biases and able to make well-informed rational decisions, especially in troubled times like these.
Missing the top 10 days
The graphs below suggest the impact of missing just the top 10 days of returns invested over a 25-year and 40-year period, the end period value grows to only half the value of the blue line that represents remaining fully invested.
What are the primary risks of market timing
- An investor will miss positive price movements while waiting for the perfect moment
- It is frequently difficult to predict when a market will turn, causing them to invest at the wrong time.
Most studies show that for the average investors, buy hold strategy yields much higher returns with lower stress over time, giving long-term investing more precedence. We find clients tend to overreact to bad news and underreact to good news which is counterproductive as:
- bull markets have longer days – 852 days
- bear markets – 236 days
Remain invested
Benjamin Graham who is famous for being considered the father of value investing once said “In the short run, the market is like a voting machine, but in the long run the market is more like a weighing machine.”
With geopolitical issues, constant central bank adjustments, currency fluctuations, and rapid inflation increase, 2022 is likely to remain volatile, resulting in prolonged uncertainty. As a result, it is critical to remain invested as success is achieved through market time, not market timing.
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