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Here's why you can't time the market


By Stuart Ritchie - May 23, 2019

This week, a reader asked this very question.

And I know why.

It’s against our nature to sit back and do nothing.

As investors, when markets are volatile…

We feel compelled to react.

But this is the last thing we should do.

Here’s why.

As an investor building wealth, we want to see results.

And we want to see them now.

The media drives this with click-bait headlines getting you to buy into the latest investment or panic about a sudden market crash.

As a financial planner who’s helped thousands of global investors…

I’m constantly reminding clients of their long-term goals and how time in the market is far better than timing the market.

But not everyone has an adviser acting in their best interests.

Perhaps the blog subscriber who asked us this is one of them.

So, I want to answer this question for him, and all our readers.

Using evidence and facts.

 

The results speak for themselves

Imagine this scenario…

Two senior executives, John and James, both invest £1,000,000 on 3 January 2000 in the S&P 500.

Over the course of 20 years to 31 December 2019, both keep their investments…

Albeit with different investment strategies.

John invests the money and leaves it alone, choosing a long-term approach and ignoring whatever happens in the markets.

James, on the other hand, enjoys the thrill of a more active approach – selling when the market is low and buying when it’s high.

Who lands up with the larger investment?

Like Aesop’s famous fable ‘The tortoise and the hare’

A slow and steady approach ultimately wins the race.

 

The real cost of timing the market

One of the biggest risks of trying to time the market is being out of it when an unexpected rise takes place.

Losing out on periods of growth.

Often these days happen immediately after a correction.

Meaning that by staying invested, you have the best opportunity to capture growth over the long term.

As I mentioned…

Your view should be time in the market, rather than timing the market.

Even missing out on 10 ‘best days’, could chop your investment in half.

At the end of the 20 years, John's investment grew to a substantial pot of £3,243,638.

James, however, misses out on 10 ‘best days’ because of his constant buying and selling.

His investment value ends up being worth only half of John’s.

Simply the result of missing only 10 trading days in a period of over 5000.

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Market timing is a pure gamble, summed up beautifully by Matt Hall in his book, Odds On

Most investors try to pick the right investments and time the market’s moves, but their chances of winning are as slim as their chance of beating the house when they walk into a casino. The deck is stacked against them.

No one knows what the markets will do, which means market timing doesn’t work.

It also means you miss out on the power of compounding…

Which needs time to work its magic.

Remember, Warren Buffett made 99% of his fortune after turning 52.

(Despite investing from a very young age).

Maximising growth comes down to patience, time and compounding.

 

Telling it like it is

The answer might not be what our reader hoped for.

But it’s the truth.

Too often, investors are fed a bunch of comforting lies, conflicting or biased information that work against them.

That’s not what we do.

We prefer to be radically transparent about how to build and manage your wealth.

So if you want a financial planner who has your best interests at heart, give us a try.

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