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Attempting to time the market is one of the biggest mistakes even experienced investors make that often results in the loss of wealth. Trying to time the market by switching between investment vehicles either after a surge or slump doesn’t work nor grow your wealth because the probability of the market subsequently turning in the opposite direction is quite high as markets are often irrational and ruled by sentiment. Investors who try to cash in on market moves fare much worse than those who keep invested for a longer-term, irrespective of the market’s volatility.
Renowned investor Peter Lynch believes that far more money has been lost by investors trying to predict corrections, than lost in the corrections themselves. According to the loss aversion theory, this is normal as human beings are inclined to focus more on the negative than the positive.
The past few months have largely been underpinned by volatility and uncertainty as global financial markets recorded the worst investment performance since the 2008 Global Financial Crisis.
Markets endured rapid swings only to correct again before most investors got the chance react. Market influencers such as credit rating downgrades, land expropriation developments and state capture inquiries were enough to unsettle investors and prompted many of them to evaluate their own investment portfolios. If the market moves were extensive, they often acted on emotion and either moved or re-invested their capital elsewhere.
While this is normal according to the loss aversion theory, it is almost always the wrong move. To try and time the market usually places the investor at a disadvantage. CPF, Wouter Fourie explains why:
Costs: Switching from one investment vehicle to another will almost always cost you money and the exorbitant fees that you incur will undo some of the future growth that the new investment will accumulate.Uncertainty: Just as you did not anticipate the first big market shock, it is most likely that you may not be able to predict the next one, which will result in a loss of growth or additional invested capital should your new investment also decline suddenly.
Tax: Moving investments that have already accumulated capital gains will result in the incurrence of additional tax, which will reduce your investment.
Delay: Moving capital between different investment vehicles is a slow and rigorous process. You are likely to lose more capital as the markets decline before you have time to react and you may lose growth potential in the market when you suddenly invest in a stock that has had a stellar performance, essentially buying high into a market that might begin to decline at your exact point of entry. Nobody can accurately predict how markets will perform
Trying to time the market when investing is virtually impossible, and the 2008 global financial crisis serves as evidence of this. It was categorised as the worst financial collapse in history after global stock markets crashed. Many big corporations went bankrupt and no economist nor the International Monetary Fund (IMF) which was designed to be the guardian of the world’s economic and financial system was able to predict with certainty a catastrophic collapse of this magnitude. Why? Because markets are irrational and ruled by sentiment.
Source: PSG Wealth research team This graph illustrates how money has streamed into, and out of, a popular South African balanced fund. After a downbeat performance by the fund, clients often opt to withdraw their investments, essentially selling low. The sell-off continues until the fund starts to gain momentum and outperform benchmarks again. Investors get the timing completely wrong as almost at the exact point when performance declines again, investors come to the realisation that the fund has had good run and start investing in it again, buying at a high and having lost the opportunity to accumulate higher returns. The discrepancy between the higher returns that investors might potentially earn and the lower returns they do earn as a result of their own behaviour is a global phenomenon called the Behaviour Gap.
Data from DALBAR’s annual Quantitative Analysis of Investor Behaviour (QAIB) shows that US investors in index and equity funds largely underperform the index as a result of incorrect market timing.Markets eventually bounce backThe global financial crisis of 2008 was undoubtedly the worst financial crisis of the decade however, how the bear market felt to you had everything to do with your position in your investment lifecycle. Your initial capital and behaviour during market shocks have a lot to do with your outlook from a portfolio perspective. It is important to understand that as much as market crashes are an inevitable part of the investment cycle, markets eventually bounce back and recover from slumps and this gives investors a golden opportunity to accumulate higher returns. It is therefore advisable to focus on your long-term investment horizon and filter out the noise of daily market movements.
Forbes Africa notes that when trying to time the market the investor must be correct twice i.e. the perfect point of exit and again, the perfect time to re-enter the market ” this have proven to be virtually impossible to do. However, while you can’t control the markets, you certainly have the power to decide how you react to them. This is called having a plan. It is advisable to work with a trusted financial adviser so as to create an investment plan that you must adhere to ” even when the pressure mounts and you feel the urge to change the plan due to market turbulence. If history is anything to go by, market recoveries are just as inevitable as market declines.
The longer you stay in the market, the better your investment returnsIf history is anything to go by, we’ve seen that more often than not, the returns accumulated from staying invested for a longer-term far outweigh the returns accumulated from trying to time the market. A more successful strategy to investing and to creating sustainable wealth is to remain patient and to spend time in the market. This evidently means staying focused on a well-thought-out goal and remaining committed to a carefully considered investment time horizon.Heading: The true cost of timing the market
This graph illustrates the true cost of timing the market and demonstrates the percentage of an investment lost when investors incorrectly time the market, getting out of the market at exactly the wrong time. Investors subsequently sell low, forfeiting the opportunity to accumulate higher returns when the market inevitably recovers. The longer you remain out of the market, the bigger your loss on potential returns.
Bottom Line: Instead of concentrating on market volatility and turbulence that comes with day-to-day trading – wondering how the market will react tomorrow, it is far better to stay focused on developing and maintaining a sound investment plan.
A plan that protects your investment across a wide range of possible market conditions, helps the investor ride out the natural cycle of short-term volatility. This plan coupled with patience, gives the investor peace of mind knowing that their long-term investment is protected without having to worry about short-term trends. The PSG Wealth solutions use robust and proven methodology and are designed to reduce short-term volatility without compromising on long-term returns ” ultimately, helping clients to manage their emotions more efficiently and helping them achieve their financial goals.
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