I have always been fascinated by the way the market fluctuates, whilst I don’t follow it religiously, I keep an eye on the ASX in the afternoon at close, and the DOW as I eat my corn flakes in the morning.
It’s up, its down or it stays the same. All in all, the market tends to behave itself. Being an Financial Adviser, I have people come up to be all the time saying, “you should be able to double my money, a mate of mine bought XYZ shares last week and today they are worth twice as much as he paid for them, why can’t you do that?” My response is generally, the best way to double your money is to fold it in half.
I have had stocks, that I have looked at and predicted them to be good earners. In some cases they have not only doubled in value, but gone up 10 times what I had tipped them at or paid for them myself. Any company listed is there to turn a profit, why would they not want to do that?
However, chasing that magical stock has the potential for investors to become unstuck. When deciding the best approach to investing, it’s often a battle between Time In The Market Vs Timing The Market.
Oracle stresses the importance of investors having a clear idea of their goals, as well as the time frame for their financial plan, before starting the investment process. We call this setting your SMART goals. The onerous part of the first meeting with an adviser, is when we talk about you and what you want to achieve, and not your investment returns.
Why “Time in the Market” beats “Market Timing”
When attempting to time the market, a stock buyer tries to predict the future market price of a stock. Meanwhile, when an investor invests to grow their wealth in the long term, they buy stocks without trying to guess when the market will be at its lowest and highest point. That brings us to the question of, which one has better results?
What is Timing the Market?
Buying stocks at the right time, at the lowest price in the hope that over time they will go up, generally the hope is that these stocks will rise quickly, and you will make a quick profit. All is well and good; you are cheering and the greatest investor you know. Then you hit the next stock, similar company, similar forecasts, but it goes the other way. Then it becomes the fault of your adviser.
Timing the market involves a person trying to predict the future. There is a high probability of failure with this strategy because no one rings a bell when the market is at its peak or at an all-time low. We don’t know what we don’t know. Although, it sounds ideal to buy stock and sell it shortly after for a profit, it’s often too good to be true. There are always people who get lucky, but that’s exactly what it is: luck.
As a society we celebrate our wins, people often tell you they bought for example BHP at $5, nobody ever tells you they bought at $55, when the market was at the time $35. Even the best companies have fluctuations.
Timing the market can also bring unexpected financial repercussions. Stock broking platforms cost money to make trades. The more stocks bought and sold, the more money you are paying out eating into your profits. Even worse, the investor must pay the commission regardless of if they earn a profit or not. Investors must also consider the tax consequences of trying to time the market.
Even if you were to pick every peak and every trough on the way up, the investor will be paying capital gains tax at their marginal tax rate on every transaction, which may impact the ability for this investment to compound over this time. The investor that holds the entire period (assuming the 3-5 years) will pay half their marginal tax rate and has not allowed tax to reduce their base. This is, of course, assuming you can accurately forecast every time the market will turn, which even the best investors can’t do.
Does Timing the Market Work?
Legendary investor Benjamin Graham stated that ‘In the short term the market is a voting machine and in the long term it is a weighing machine’.
We believe the biggest driver of earnings over the long term is earnings growth, but in the short term, it could be any number of things. We don’t pretend to try and predict when short term movements will occur or which stocks will be popular this month (voting machine), but we do try and predict which companies will have grown their earnings in the next 3-5 years (weighing machine). Whilst the market and the share prices of these company will almost certainly gyrate up and down over this time, if they grow their earnings in this time, the share price in 3-5 years’ time should end higher.
Secret to Long-term Wealth is Time in the Market
Time in the market, as opposed to timing the market, does not involve short term predictions. It considers the risk you are wanting to take now and makes investments with calculated risk over time to achieve your desired outcomes.
The reason, I touched on earlier is the market has a certain way of behaving. A smart investor understands that and is clued into the risk factors that are associated with the level of risk they intend to take when investing.
Most superannuation funds accumulate over time; therefore, we look at time in the market versus timing. We ride the waves of success and failure. Some people don’t have the time to ride the waves and they need the opportunity now, however would they dump their life savings, or take a calculated risk?
By working with you with your SMART goals, we can understand the time you have and the need, giving you time and educating you on the risks you need to take. If you want to retire in 10 years’ time, and you know how much money you need to live off, we can tailor a financial plan that suits those needs and allows you the time to get to where you need to be. Over the long term the markets play the game.
It’s Never Been a Better Time for Financial Advice
Time in the market, far outperforms timing the market, take for example the recent correction we had in March of 2020, it was unprecedented a global pandemic that shut the world down.
Did anyone call you in February and say, “hey the market is at is all time high you should sell out and move your money to cash?” I know I didn’t call anyone. Within 6 months, the market had corrected the losses and now it has come back to its peak and we are still in this pandemic. Investors need to be able to accept there is risk in any investment decision they make, it is the level of risk and the time they have that gives them the best outcomes over time.
To quote Warren Buffet “Someone sits in the shade today, because of a tree you planted 20 years earlier”.
Think of that as your home, you own your home now, because 20 years ago you decided to buy a house, at a ridiculous price…at the time. You spent time in the market, had you have waited 5 to 10 years to get the house at a price, you may have missed the opportunity.
Time In Vs Timing, I know where I sit. It’s in the shade.
Get in touch with us today for complimentary consultation to discuss your financial position and we can provide you advice tailored to your unique situation.