Time in the markets is more important than timing the markets

User Written by Carl Turner on December 04, 2014.

Time in the markets is more important than timing the markets

Investing to reach your own personal financial goals, whether they are saving for your retirement, an education fund for your child or a deposit for a house is easier than many people think. If you are new to investing you might imagine that once you have an investment portfolio you will need to be monitoring the value of your investments on a daily basis and buying and selling based on the mass of information that you can read online or in the financial press. In fact this is a strategy that I would advise strongly against.

For the vast majority, successful investing is about a considered approach over the long term. There are a few fundamentals to investing which I advise for all my clients. Careful asset allocation to select a portfolio which is diversified across different companies, industries, countries and asset classes is critical, as is keeping track of how your investments are performing with regular reviews on your portfolios at least once a year and also following major life events, such as getting married or having a child.

However chasing short term highs which take advantage of dips in the market is a strategy which will not pay off in the long term and should be avoided. We all know that the “buy low, sell high” paradigm is the holy grail of the investor and it may sound simple, but trying to achieve it is extremely difficult, even for professional investors.

Predicting market movements is just as tricky, if not more so than predicting the weather, especially in markets which can be extremely volatile and react to so many different external factors. If you are relying on financial reporting to make your decisions, chances are that you will buy late after prices have started rising and sell only once a decline becomes apparent thereby failing to outsmart the markets. In addition market timers become so hung up on finding the perfect moment to buy or sell that it is all too easy for them to become emotionally involved in short-term investment decisions that they lose site of their long term objectives, not to mention the high levels of stress involved with this approach.

The key to ‘peace of mind’ investing is to stay focused on a carefully planned and implemented long term strategy. If you are still not convinced about the value of staying invested, consider the figures below, which illustrate the potential pitfalls of trying to time the market. It clearly demonstrates that missing the top 10, 20 or 30 days of trading over a 15 year period can have a huge impact on returns.

Investing in the S&P/TSX Composite Index for the last 15 years

Period of investment Average annual return
If you stayed fully invested 7.07%
If you missed the 10 best days 2.68%
If you missed the 20 best days -0.04%
If you missed the 30 best days -3.27%

From January 1, 1995 to December 31, 2009 (3,776 trading days). Source: TDAM

Obviously with consistent investing like this you may miss out on maximum gains but you will also avoid maximum losses. Although many people perceive that investment success is getting the highest returns, I would argue that maintaining investments within your comfort zone and avoiding panic trading at the wrong time is much more important.

In summary, a long term investment plan does not need to be complicated – prepare your strategy, diversify, review regularly and above all don’t try to play the markets. Of course you can do all this on your own but a professional financial adviser can be invaluable in helping you to determine your strategy and stick to it.

Carl Turner

Carl Turner

Posted on December 04, 2014 in Investments.