Let’s Talk … Market Timing

Time in the Market vs. Timing the Market

With share investments it can be tempting to try to time the market, however, naturally there are consequences for timing this ‘wrong’. Not only do you need to determine the ‘right’ day to buy, but also the right time to sell. This is something that even experts are not always able to predict accurately. The well-known Warren Buffet saying is testament that market timing is difficult, at best. “The stock market is designed to transfer money from the active to the patient.”

Market Timing: At its simplest, this can be defined as purchasing some security with the expectation of selling in the short-term, at a higher price. However, as the future is uncertain and with stock prices changing rapidly, essentially, it is impossible to consistently and accurately determine the right time to buy or sell.

Time in the Market: Time in the market can be described as consistently investing over time without trying to guess the market’s highest or lowest points. There may be times when you buy at a high point, but you understand it won’t have much of an impact on your portfolio returns in the long-term.

Overall, time in the market is a more reliable wealth-creating strategy. A diversified portfolio of investments, held for several years, has historically proven to provide greater returns than investments from those who jump in and out of the market at what they believe are the low and high peaks.

Some key points to note:

No-one has a crystal ball

Simply put, nobody can predict the stock market. There is never a ‘sure thing’. Trying to predict stock market prices can end up costing long-term investors.

Compounding works to your advantage

Buying stocks for the long-term allows you to take advantage of compounding. Time is your greatest friend as an investor, and being able to reinvest dividends can create significant difference to your wealth.

You’ll pay less in taxes

Another advantage of long-term investing is that you’ll pay  less in taxes than if you’re an active trader, as profits from trading are taxable.

Frequent trading is expensive

Frequent trading will rack up brokerage commission costs, particularly for smaller investors as these fees and costs can make a significant dent in investment returns.

Emotions shouldn’t be involved

Investors who monitor stock prices too closely tend to make emotional decisions. If they see a gain, they may be tempted to sell too quickly to lock in a small profit. On the flip side, if they see a loss, they may panic and sell, changing a paper loss into a real loss.

A worthwhile first step in an investment process is to be clear on what your goals and timeframes are. Once you do this, the aim shouldn’t be to ‘beat the market’, but rather to reach or exceed your personal investment goals. Choosing the same investment approach as others isn’t necessarily wise; their goals, time horizon, and purpose for their investment may differ from yours. Remaining focused on your own goals is a more beneficial strategy, along with gaining practical support - reach out to your local accountant or investment advisor for further in-depth advice.