While having a wander around the web, I found a really neat interactive game. It lets you try your hand at choosing when to buy and sell stocks over a ten year period based on news headlines which flash up underneath the graph and compares your performance to that of someone who chose to buy and hold the same value of stocks ($10,000) over the same period. So you think you can time the markets?
You can check out the link and have a go here. On my first try my investment of $10,000 grew to $14,369. Not bad you might think, but my return was less than half that of my buy and hold opponent who ended up with $19,130. In actual fact, my performance was pretty miserable – in a market that grew 6.7% per year, I made a dismal 3.7%, losing out by 2.8% per year.
Yes, it’s just a game but there is a serious lesson to be learnt here and it is this:
Trying to time the markets is a poor investment strategy
And here are four reasons why:
1. Timing the markets is fiendishly difficult
The aim is simple – buy when prices are lowest and sell when they are highest – but the execution is another matter altogether. No-one ever knows the precise moment when a stock price will peak or trough so deciding the exact right time to sell is a guessing game. Even though investment managers have vast amounts of data at their fingertips to base their decisions on, with so many different factors having an influence trading is by no means a science.
2. You have to get the timing right twice
Assuming that most movements in and out of financial markets are switching between different funds, shares or asset classes, as opposed to cashing in investments, there are two timing decisions to be made: when to sell and when to buy back in. The chances of timing both decisions to perfection? Slim.
3. Timing the markets is stressful
Decision-making requires thought and effort and making decisions that you regret can cause disappointment and ruminating on how your timing could have been better is inevitable. All that takes up mental energy which I’m sure you could employ much more profitably elsewhere.
4. Timing the markets affects performance
Market timers attempting to avoid downside damage when they expect markets to fall will sell and convert investments to cash or other assets. However, research has showed that the best days in the markets tend to follow some of the worst so the chances of missing out on those is high. And that can seriously impact savings.
I genuinely believe that the difficulties inherent in predicting market movements with consistency means that a market timing strategy is not going to offer any significant advantages over buy-and-hold for the average investor. That is why our policy at Infinity is to advise the vast majority of our clients to favour buy-and-hold with a diversified portfolio which spreads risk and periodic reviews for occasional rebalancing. That has proved to be the most effective route to capital growth over the long term.
I can honestly say that my main driving force at Infinity is a fundamental belief that good financial planning makes people’s lives better. People working abroad really do have an enviable opportunity to make a huge success of their lives, and making good financial decisions is essential…as well as working damn hard!