The financial markets are all over the map these days. One week they’re soaring upward because something dropped in the news about inflation numbers, and the next they’re crashing through the floor because, well, inflation numbers. Amid all of this, it can be tempting to try and time the market – that is, to buy when you think the market is low, and sell when you think it’s high. Timing the market is super-risky, and impossible to pull off consistently. Here’s what you should do instead.
Put money in regularly.
It’s amazing the difference this can make to your investment returns. If you take a look at the one-year period from February 1, 2022 to January 31, 2023, you’ll see that the TSX was up just 0.5% for that timeframe.
You’re not exactly calling home about that return.
But what if you had invested the same amount of money every month during that period? Well, thanks to the magic of dollar-cost averaging, you would have earned an average return of 5.3% – over 10x the actual marker return during the same timeframe.
That’s pretty darn impressive, for a strategy that puts absolutely no thought into what the market is doing at a given moment.
In contrast, if you tried to time the market, the very best return you could have achieved would have been around 15%… oh and by the way, you would have had to have been extremely lucky to pull that off, because there’s absolutely no way of knowing where the bottom would be ahead of time.
You would have had to put your money in on the very same day that the markets hit the lowest point of the year. Personally, I don’t love your odds. Oh and by the way, if you got it completely wrong, and instead put your money in at the highest point of the year? You’d have lost over 20% of your investment over the same timeframe.
Yeah… I’ll take dollar-cost averaging over market timing any day.
Be mindful of your timeframe.
The longer your investing horizon, the less meaningful short-term fluctuations in the market are for you as an investor. If the markets go nuts for a few months, or even a couple years, but you’re investing to retire 20 years from now… then do those fluctuations matter? Not really. In this case, the impact of timing the market, even if you get it dead-right or dead-wrong, is lessened in the grand scheme of things.
But say instead that you’re saving for a new home, and hope to buy it five years from now. All of a sudden, poor market timing into a volatile investment can absolutely wreck your plan. In this case, it’s important to choose investments that aren’t as prone to wild fluctuations like that… and also to invest regularly.
Recognize your own emotions.
On a related note to the previous point, if you know you’re prone to timing the market, maybe consider investing in assets that don’t fluctuate as much. That way, you keep yourself from giving in to temptation. There are plenty of investment strategies that produce good returns without as much in the way of volatility; dividend and covered call strategies are interesting ones to look into.
The other reason it’s important to be aware of your emotions is that, if you let them get the better of you in a down market, you could wind up selling at the absolute worst time. If you do, you lock in those losses and lose out on the market rebound that comes later.
If you’re prone to panicking when the markets tank, then don’t look at the markets at all, find investments that aren’t as volatile, or invest regularly. Or, you know… do all three of those.
Invest in a diverse portfolio.
There are a bunch of different ways to diversify your portfolio, but all of them have the same aim, which is reduce the volatility. Different investments move in different ways, and are affected by different economic forces. By diversifying your portfolio, you can reduce the intensity of short-term ups and downs that might make you lose your grip on logic and invest emotionally instead (big no-no).
If you MUST buy the dip…
Wait until the investment drops 10-20%. A couple percentage points drop in an investment isn’t news; it’s a Tuesday. Double-digit drops? That’s another story.
If you’re thinking about buying the dip on an individual stock though, be sure to ask yourself why it’s dropping so hard in the first place. Plenty of well-intentioned investors have thrown good money after bad, chasing losses and trying to time the bottom, only to find that the company was in the process of going bankrupt. Chasing the bottom in that case cost them everything.
Wrapping it Up
I’m not a fan of market timing, in case you couldn’t tell. It’s not that it’s completely impossible… it’s just that it’s impossible to do consistently. Luck plays too much of a role in that strategy for me to be interested in it as a long-term investing approach. In my opinion, making smart choices that reduce your timing risk and still deliver strong returns is a much more reliable plan for getting where you want to go with your money.
