It’s the great investor fantasy: quit the stock market at the top and buy back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.
History is littered with the failed dreams of market timers. Less than five years after the lowest point of the Global Financial Crisis, some pundits were saying US stocks were over-valued. Another five years on and the market had gained more than 60%.
But the most overlooked challenge with market timing is that it requires you to make two correct decisions: you must get out at the right time – and you need to know when to get back in.
Think back to the global financial crisis. Plenty of people were throwing in the towel by early 2009. But how many bought back into the market in time to enjoy the big bounce that followed in the second and third quarter of that year?
The fact is, market timing is tricky, because big gains and losses can come relatively short periods. Not even the professionals have much of a track record in successfully negotiating these unpredictable twists and turns.
If marketing timing is a mirage, what can you do? Here are 3 alternatives that make more sense – and none requires a crystal ball:
- Take the long view
“The historical data supports one conclusion with unusual force,” the index fund pioneer Jack Bogle once wrote. “To invest with success, you must be a long-term investor.”
Instead of trying to time the ups and down of the markets, why not simply change your time horizon? Over the very long term, patient stock investors holding diversified portfolios have almost always been rewarded.
- Construct a portfolio for all seasons
Whatever your risk capacity, diversification is key. Spreading your risk across different asset classes and geographies will reduce the impact of a steep decline in one particular market. Ultimately, it’s your asset allocation that’s going to be the most important driver of your investment returns.
- Carry more cash
Everyone should hold enough cash to cover three to six months of living expenses, in case of, say, unexpected medical bills or you lose your job. But nervous investors may want to hold more than that. The advantage: your portfolio will hold up better in a market downturn, plus – if you’re feeling courageous – you’ll have extra cash to put to work when share prices are lower.
SUMMARY
In summary, timing the market – while superficially an attractive idea – is fraught with danger. If you get lucky, great, but there’s no method to it. We’ve seen that not even the gurus are much good at it.
The good news is that second-guessing the market just isn’t necessary. With the right outlook and a methodical process, you can achieve better results – and enjoy a smoother ride along your investment journey.
Stay Healthy, Stay Calm, Stay Focussed.
Jason Fowler
