Time In The Market – Not Timing – Is The Key
Sports commentators often try to forecast a winner, only to see their prediction fade away as their chosen team loses.
Similarly, some investors practice market timing in an attempt to predict stock winners, only to be disappointed by the reality of unexpected swings in performance.
In both cases, the best way to come out a winner is to rely on time — not market timing — to increase your fortunes.
Market timing is an investment strategy in which investors attempt to forecast the best times to invest in the market and when to get out. Market timers rely heavily on the same predictive research and market analysis used by financial analysts and mutual fund managers.
Proponents of market timing believe that successfully forecasting the ups and downs in the market can result in greater portfolio performance. However, forecasting the market requires a level of expertise that most individual investors do not possess.
Although market professionals may boast that their particular timing strategy reaps massive rewards, one of the biggest risks of market timing is the risk of missing the market’s best-performing cycles. This happens when an investor, predicting that the market will go down, removes his or her assets and places them in money-market securities. Then, while the assets are out of stocks, the market rallies instead of declining.
In this scenario, the market timer did not correctly predict and missed the top months.
Secondarily, individual investors must overcome trading expenses and capital-gains taxes when market timing. Undoubtedly, the best move for individual investors — especially those with long-term goals – is an investment strategy of buy and hold.
Holding investments through the market’s ups and downs can often work to your advantage. For example, missing the top 20 months in the 30-year period that ended Dec. 31, 1999, would have cost you $41,000 in potential earnings on a $1,000 investment in Standard & Poor’s index of 500 stocks.
Similarly, a $1,000 investment made in 1990 and left untouched through 1999 would have grown to $5,330. If, while practicing market timing, an investor missed the top 20 months in that 120-month span, they would have cut their accumulated wealth to $1,430.
Successful investing requires patience so time can work to your advantage. If you are not a professional money manager, the best investment strategy is to buy and hold.
With a buy-and-hold strategy, you can take advantage of the power of compounding — the ability of your invested money to make money. Compounding also lowers portfolio risk over time. So, as your investments grow, the chance of losing principal declines.
However, an investment strategy of buy and hold does not mean that you should ignore your portfolio. Regular evaluations of your investments are necessary. Most market experts believe that annual reviews are enough to ensure that your investment portfolio will keep you on track to meet your objectives.
Normally, a young investor begins investing for long-term goals such as marriage and buying a house. The majority of his or her portfolio will probably be in stocks and stock funds. As history shows, stocks and funds have offered the best potential for growth over time, even though they have also experienced the widest short-term fluctuations. As investors age and their investment goals change, they should revisit their portfolio to rebalance assets as financial needs warrant.
Clearly, when it comes to successful investing, time is a much better friend than timing. The best approach to your portfolio is to arm yourself with all the necessary information and then consult an advisor to help with the final decision. It is paramount to remember that your long-term and short-term investment decisions should be based on your personal financial needs and your ability to accept the risks that are inherent with each investment.
Peter J. LaBella CFP® is founder and president of FMA Advisory Inc.