Why Time in the Investment Market Always Trumps Market Timing

Anyone who claims to have a crystal ball that can predict the best time to cash out of an investment should be viewed with a generous helping of scrutiny. ‘Timing the market’ may seem like the most logical or conservative thing to do when you’ve invested a large chunk of your savings into something and the economy starts to slump. However, pulling an investment from the market prematurely often doesn’t mean that you’ve dodged a bullet. Instead, it just means that your investment didn’t have enough time to mature in the market.

In this blog, we’re looking at why time in the investment market always trumps market timing.

Market volatility is inevitable

Over the past couple of years, we haven’t just witnessed events that have affected the global economy – we’ve experienced them first-hand. The Covid-19 pandemic saw a huge percentage of the workforce losing their jobs as entire sectors had to shut up shop for months and even years at a time.

However, as unexpected as the pandemic may have felt, it’s not the first time that we’ve experienced economic turmoil, and it certainly won’t be the last.

Market volatility is cyclical. History has proven that bull and bear markets alternate over time. A bull market occurs when the market is rising at a higher-than-average rate, while a bear market occurs when share prices fall. The positive thing about bear markets is that they are generally short-lived. Over the past 75 years, bull markets have lasted for an average of 49 months, whereas bear markets have lasted for an average of just 13 months.

Therefore, it’s fair to say that when you’re investing long-term, it’s generally more fruitful to hang in there than to feel the pressure and cash out because the market is dropping. Peter Lynch who ran the Fidelity Magellan Fund for 13 years has a now-famous quote about timing the market – Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

The difference a day makes

While there is always an element of risk involved in investing and the ‘perfect day’ to leave the market doesn’t exist, the concept of time in the market is something that consistently contributes to a successful investment portfolio.

Time in the market is all about perseverance. When funds are withdrawn prematurely due to rash decision-making, it means that they simply do not have time to recover and grow. J.P Morgan demonstrated that by missing the best 10 trading days between 1999-2018, your potential return would be halved. The most interesting fact about this? 6 of these 10 days actually took place within two weeks of the 10 worst days.

If you consider all of the global events that occurred between 1999-2008, you could see how easy it would have been to think that withdrawing an investment early was a sage move. However, the reality was quite the opposite.

The 4 Key Principles for Growing an Investment Portfolio

So how can individuals ensure that their investment portfolio will become as successful as possible?

  • Stay disciplined

    Keeping a level head is absolutely essential when you’re investing in the stock market. Any long-term investment is a commitment that requires self-control. A qualified financial advisor can guide you through any ups and downs in the market over time.

  • Understanding market volatility

    The more educated and informed you are about the peaks and troughs that will inevitably exist within the market, the less rattled you are likely to feel about the effect of economic events on your investment.

  • Cash isn’t always king

    Even though a positive return on long-term investments is never guaranteed, keeping your savings in cash is also not the answer to reaching your financial goals. Inflation drastically affects the value of cash over time, so leaving your savings in cash or a short-term deposit account will typically leave you without any kind of notable return.

  • Diversify, diversify, diversify

    The best way to mitigate risk when it comes to investments is by not putting all of your eggs in one basket. Spreading the risk by having a diverse investment portfolio is one of the wisest moves that you can make. Your investment portfolio should ultimately reflect your own attitude towards risk while working hard to achieve your financial goals – whatever they may be. Splitting your investment into multiple pots (with the help of a professional advisor) can keep you on track in spite of any market slumps.

    When it comes to time in the market versus timing the market, the most important thing to remember is why you were investing in the first place. Persevering with your long-term financial plan and drawing on the expertise of professionals is the real secret to being comfortable with time, rather than succumbing to ‘timing’.

The information above is purely for educational purposes and does not constitute advice on any particular investment strategy. Please seek 1:1 advice on your individual investment portfolio.

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