Timing the market with short-term forecasts could turn out to be extremely harmful to your portfolio. Imagine walking in the park and coming across an owner of a pet dog walking the pet, and the pet is darting to its left and right while the owner is heading towards his destination. In order to invest successfully, it’d be wiser to understand and follow where the business is going (pet owner’s destination), instead of where the stock prices are going (direction of his pet).
And timing the market to invest would be akin to trying to predict a pet’s zoomies.
Does Market Timing Work?
There might be an urge to time the market to get the best returns, but in reality, perfect timing does not exist (see A in above chart). No one has a crystal ball in order to invest perfectly every month at the lowest point. And adopting the strategies of B and C demonstrate a clear advantage. Dollar Cost Averaging (DCA) allows you to deposit equal sums of money into the investments on a set timetable regardless of the price of the equity, over a chosen time period.
In fact, when Benjamin Graham, Warren Buffett’s teacher, was asked what keeps most investors from succeeding, he said: “The primary cause of failure is that they pay too much attention to what the stock market is doing currently.” Of course investors ought to be happy when they are selling to a stock market’s “ridiculous highs”, as well as buying in when the price is low. However, Graham also urged investors that, for the rest of the time, they will be wiser to form their own ideas of the value of their holdings, based on full reports from each company’s operations and financial position.
What’s the cost of emotional investing?
Many investors face fear and greed when it comes to making investment decisions, and these emotions can cause them to make the worst decisions. While the successful investors live by “buy low, sell high”, most average investors do the opposite. As the market climbs higher, the average investor fears missing out and keeps buying in at higher and higher prices as greed often makes investors take on more risk than necessary – like Icarus flying closer and closer to the sun, gaining height but taking a fatal fall when the heat from the sun melted the beeswax that attached his wings.
On the other hand, instead of recognising a falling market as a temporary turbulence and an opportunity, the average investor becomes fearful and sells everything at a low or at a loss. This psychological push might be even more powerful as a loss is more keenly felt than a gain of the same magnitude, when the investor feels that what was lost was in his possession in the first place. What is important again, is the ascertained value and not the price. DCA can be adopted to reduce the emotional volatility of investing,
Conclusion
Eventually, investing is not about beating others at their game, but controlling ourselves at our own game, especially with regard to our emotions. And a strategy that automates investing such as DCA is particularly effective to get us started right away. Success comes to those who dare set their sights, have faith and set themselves to work.
And we have our work cut out according to the formula for an investment’s future value. Even though n plays an extremely important role in compounding, and r pertains to how well the investments perform on an annual basis, what is most crucial is PV.
PV relates to how much we could put aside for investment, and how much we can put aside is absolutely within our control. And wouldn’t you like to start taking control to upsize your investing rate, especially during a bear market?
