Why timing the market may not be such a good idea

Timing the market rarely works, here’s why.
Why timing the market may not be such a good idea?
Reading time: 5 mins

Let’s be honest, most of us would love to be able to predict the future. Knowing what will happen tomorrow, next month, or next year would come very handy, especially if you’re currently investing and want to know where the markets are heading next. Unfortunately, nobody can predict the future, not even investors…

 

What do we mean by ‘timing the market’?
All financial markets have ups and downs, and most investors want to take advantage of the good days and avoid the bad days. Makes sense, right? After all, it’s a good way to make profit and minimise losses, but how do you know when to invest and when to jump ship? Well, here’s the tricky bit. You’ve got to time the market, in other words, you need to guess when the good days and bad days are coming. Doesn’t sound very easy, does it? And yet, many investors try to predict when to be invested to maximise their profits without realising that their chance in succeeding is minuscule.

 

Why timing the market may not be such a good idea
The main issue with timing the market is that it rarely works. Of course, some investors get lucky and might manage to do it occasionally, but nobody can consistently predict short-term market movements. Markets are unpredictable and often illogical, so, if you ask us, it’s pretty hard to know for sure where they’ll be going next. For instance, as markets fall, many investors want to buy the dip (when markets reach their lowest point), in order to make a profit when markets start going back up. But when do you know we’ve reached the lowest point? There’s absolutely no way to be sure, in fact, the dip only becomes visible in retrospect. Obviously, you can always have a guess, but relying on gut feeling or predictions to make your decisions could harm your investment journey.

Say, you had invested £10,000 in the FTSE 100 at the start of 2000 and remained invested until the end of 2019, you could have ended up with about £21,255, meaning your money could have grown on average by 5.4% on an annual basis (including reinvested dividends). Now, let’s imagine you’d timed the market and taken your money out during the bad days or before what you thought would be the dip. You would have missed some of the best days and your gain could have been much lower, and depending on how long you were out of the market, you could have even made your losses real1.

 

 

 

What should you consider doing instead when markets fall?
Instead of trying to time the market, why not take advantage of your time in the market? Investing is for the long-term, so why worry about what’s happening over the short-term. Market bumps happen all the time, and as an investor, it’s important to learn to live with the swings. It’s not always easy to see the value of your investments fall, we understand it can be stressful and unsettling. But if you keep calm and remain focused on your long-term goals, you would typically reduce the impact of market bumps on your plan. Studies show that the longer you remain invested, the more likely you are to see positive growth. For example, people who invested in the FTSE 100 for any 10-year period between 1986 and 2019, have had an 89% chance of making a gain2. Also, another way to smooth out bumps is to make sure you’ve spread your money across investment types and regions. By diversifying your portfolio and sticking with your investments over the long-term, you’re less likely to lose everything.

What’s more, if you want to take advantage of the lows, you can, and it doesn’t require as much effort as timing the market. All you need to do is consider investing little and often – in the investment world, we talk about pound cost averaging. The principle is simple: you feed your plan regardless of market movements. But why would you invest when markets go down, you ask? Well, when markets fall, investments become cheaper to buy, so it could actually be a good opportunity to grab bargains. And if the value of these investments go up when markets recover, you should be able to make a gain. Drip feeding your account is just an easy way to take advantage of the bargains. Simply set up a Direct Debit into your investment Plan, and forget about it. Your Plan will get automatically fed and our investment team will take care of the rest.

 

References:

1: Data from Bloomberg

2: Data from Bloomberg

 

Past performance is not a reliable indicator of future results.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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