With most stock markets resembling a roller coaster, it’s easy to think that successful investment is just a matter of timing. Buy stock cheap, just before the price starts to climb, and sell just as it reaches the summit and begins its rattling descent.
Timing the market in this way is actually an effective way to lose money.
Why timing the market never works
When markets are volatile, they go up and down with little apparent cause, and even less warning. You simply don’t know what any stock is going to do next. It’s an old piece of stockbroker’s wisdom that nobody rings a bell at the top of the market. Unless you have access to tomorrow’s stock prices, you are just as likely sell a winner before it peaks and to buy a cheap stock that is set to become even cheaper.
Share prices always fluctuate, but the markets seem to be particularly volatile at present. The FTSE fell around 20% from a highpoint two years ago, hit an all time record high just a few months back, and then fell back by around 5%. You simply can’t predict which way it will go from one day to the next
This means that timing the market actually means making trades at random. This means the chances of getting a decision right are pretty much 50-50. If you pull out you have a 50% chance of doing so before a market fall. You then need to decide the right time to get back in. Statistically, the chances of both getting out and getting back at the right time are 25%, and the more buys and sells you make the smaller your chances of success.
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 generally speaking, trying to time the market though its ups and downs may decrease the amount you are likely to earn.
To make money, you simply need time in the market.
Time in the market builds wealth
The more money you have invested in the market, and the longer it has to grow, the greater the potential profits can be.
The key to success is to have an investment plan and stick to it as the market declines and recovers, to allow overall steady growth. Sharp falls in share prices can be frightening. But there is no point in selling and crystallising the loss. Simply ride out the ups and down and benefit from the recovery when it comes.
What can you do?
Investing regularly and staying invested can help smooth out market highs and lows over time.
The simple technique of pound cost averaging can help. With it 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 investment plans, it might pay to get professional help. At Continuum we can provide the help and expertise you need
The value of investments can fall as well as rise and you may get back less than you invested.