Don’t React to the Markets

Chris Broome – Chartered Financial Planner

Question = do you think attempting to time the markets, in order to avoid the perceived potential losses created by temporary volatility, actually helps or hinders your portfolios long-term performance?

From our friends at Dimensional Fund Advisors, providing it’s time in the markets, not timing the markets:

Don't React to Markets

What do you think?

Do you think you have a natural gift at identifying exactly when to get out, and then back into, the great markets?

If you’re a self-investor, how have you got on? Any regrets about not getting out sooner. Or worse, waiting too long to get back in?

You’d not be alone here. It’s why most investors fail to beat their portfolio’s own benchmark.

And here’s why.

If current market prices aggregate all known information and expectations, how can stock mispricing be consistently exploited through market timing?

In simple terms, it can’t. It is therefore highly improbably that an investor can successfully time the market, and if you do manage it, it may be a result of luck rather than skill. Sorry to be the bearer of bad news!

A further issue of market timing is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. To say again, the vast majority of the gains in your portfolio come from just a few days of market performance.

Since you are unlikely to be the owner of a crystal ball, you are therefore unlikely to be able to identify which days will have strong returns and which will not. This means that the best course of action is to remain invested during periods of temporary volatility instead of trying to move in and out of the markets.

Otherwise, you run the very real risk of being left out in the cold whilst others are benefiting from sunny days and positive returns.