"Don't try to buy at the bottom and sell at the top. It can't be done except by liars."
— Bernard Baruch, investor and presidential adviser.
The above quote is referring to market timing – the high-risk practice of buying stocks when you believe they’re cheap and selling when you think they’ve reached the highest they will go. In order to do this, you need to be able to predict where the market is headed. This means closely watching several economic indicators, market trends, current news events and even social media to gauge when you should invest and divest.
Trying to time the market may be tempting, but it rarely works, because no one really knows when the market has reached its top or bottom. Historically, downturns in the financial markets have been followed by an upturn. Of course, there is no guarantee that that will happen each time.
It is natural, as a novice investor, to want to enter the market at a low period and exit at its peak. Understanding how difficult this can be keeps many investors on the sidelines, thus missing out on potential gains.
However, knowing when to invest is not as important as how long you stay invested. Results of research by author Craig L. Israelsen, Ph.D. show that, a diversified portfolio held for 50 years from 1973 to 2022 had an average annualized return** of over 9% with positive returns coming in 84% of the time.
** A measure of how much an investment has increased each year on average during a specific period.
So, rather than trying to time the markets’ highs and lows, the astute investor will focus on time invested in the markets.
This investor will employ dollar-cost averaging. Dollar-cost averaging means investing a fixed amount of money into a particular investment at regular intervals, regardless of the share price. The idea here is that you do not risk investing your money at the moment when the investment is at its high point.
This investor will diversify the investment portfolio. This means holding different types of assets such as stocks, bonds, real estate and cash. Holding different types of assets both provides the chance to benefit from different types of market cycles and spreads the risk over the different types of markets. Another strategy is to diversify internationally. This might give you the opportunity to purchase value investments during a time the US Markets are booming.
Most importantly, this investor maintains a long-term perspective. One of the best ways to guarantee that the portfolio will grow is to invest for the long term. While the markets fluctuate over the short term, the overall trajectory has been upward. The highs keep overtaking the historical highs. Staying invested in the markets over the long term allows the investor to profit from this growth.
Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor."
— John Bogle, Vanguard founder, investor and mutual fund industry pioneer. A sound investment strategy should be designed to carry you through market ups and downs.
Investing for the long term is not easy. Sticking to the program is even harder.
Deciding what to invest in and for how long calls for professional advice.
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Sources: Investopedia, BrainyQuote, Goodreads, Motley Fool, Bankrate