Its easy to get the idea that making money in the stock market is all a matter of timing. Buy stock cheap, just before the price shoots up, sell it again just before it falls back to earth.
Timing the market could work, of course. If you had a crystal ball that showed the price of every stock tomorrow, you could make a fortune. In the real world, things don’t work like that. Trying to time the market actually cuts your returns.
The real way to make money is to make sure you have time in the market.
Timing the market – buying your funds when they are cheap and selling when they reach their maximum value
Time in the market – Investing for the long term and giving the market time to recover and your investments to weather any dips in value.
Why timing the market costs you money
It’s natural to want to sell when the market is going down, and buy when it’s on the rise. But markets are volatile, and go up and down with very little apparent cause. The fact is that nobody can see the future and time the markets.
The chances of getting a decision right are pretty much 50-50. If an investor pulls out he has a 50% chance of doing so before a market fall. He then needs to decide when to get back in. Statistically, the chances of both getting out and getting back at the right time are 25%. Try to get in and out correctly twice and the percentage drops to 12.5%. You could be lucky, and you might be able to increase those odds a little if you have an expert eye to keep on market trends, but analysis shows that trying to time the market though its ups and downs actually decreases the amount you are likely to earn.
Why time in the market builds wealth
Share prices fluctuate, interest rates vary and markets rise and fall. The FTSE, for example, fell around 20% from a highpoint two years ago, and at time of writing is close to record levels.
This volatility is extreme. A typical market cycle is probably more often around five to seven years. The key to success in the market is to have an investment plan and stick to it as the market declines and recovers, to allow them to deliver overall steady growth. Sharp falls in share prices can be frightening. But investors may be better off riding out ups and downs instead of timing the market, and benefitting from the recovery when it comes. So, the more money you have invested in the market, and the longer it has to grow, the greater the potential profits can be.
What can you do?
It’s natural to be looking for ways to smooth out your portfolio’s returns. Investing regularly and staying invested can help smooth out market highs and lows over time.
With pound cost averaging, you invest a small amount regularly. It can reduce exposure to a market downturn, reducing losses by averaging them against gains.
In a volatile market, the average price per share tends to work out lower when you save regularly. Regular small contributions can build into a sizeable pot, and investing in this way can increase the value of your investments in the long term. Paying monthly direct debits from your current account into a regular saving scheme make investing simple.
When you need to think about your financial plans for the long term, contact our professional team today.