Why trying to time the market can prove costly…

Living in an ‘always-on’ culture makes the idea of trying to time the market a very tempting one. Not only are there 24 hour news channels, endless online articles ,videos sharing ‘expert’ analysis of future market performance and more Tik Tok style financial influencers, we also have apps where we can see the real time rise and fall of your investments every second of every day.

 It’s no surprise then that people will often believe they have all they need to effectively predict the market.  People may try and offload investments after just a few days of poor performance (worried the slump will continue) or hope to cash in after a sharp uplift, in the hope that they will time the peak right ahead of another dip.

 In reality this approach risks missing the best returns. If, for example, you try to ‘time the market’ and miss just the best week or month it can have a really dramatic impact on your return. The chart below from Dimensional, one of our chosen investment fund providers, demonstrates this simply.

 The chart shows how investments in the Russell 3000 Index, a broad US stock market benchmark over 25 years to the end of 2023 would have performed. $1,000 invested in 1999 would have been worth £6,449 25 years later. But what if you pulled your cash out at the wrong time? Missing the best week, month, three months, or six months would have significantly reduced the growth of your investment.

No matter what anyone says, no one can predict what the markets will do. A proven approach to successful investing is to invest for the long term and hold a globally diversified portfolio, and review this regularly. Whatever period of time you look at, if you take a ten year view of the market, there will have been big and small fluctuations, but the trajectory for the long term period will more often than not have been upwards.

 Taking a long term view of your investments gives you the best chance of reaping the rewards. and investing at all time highs isn’t a bad entry point over the long term. US statistical data shows that even after equity markets reach a new or previous high, equity market tend to continue doing well more often than not.

 There will always be economist predicting the next recession. They have predicted at least 12 of the last 7 recessions! Like a broken clock, they will be right eventually, but a lot of opportunity can be missed along the way.

 Yes, there are the odd few who have successfully foreseen particular market behaviours and cashed in, but these are rare and are often more down to chance than anything else. And for every deal they made that paid off, there will be just as many (if not more) that have gone the other way – they just don’t shout as loudly about these.

Some investors have shorter term requirements with some of their savings and investments, like those drawing in retirement, and can’t always afford to accept the short term volatility of markets. They need a financial plan and investment strategy that recognises this. But it is also essential to continue to own growth assets as part of this to help the investments outlive the investor.