Why Timing The Market Almost Never Works in the Long Term

Stock markets globally have dropped up to 20% or more during the course of 2022. Volatility remains high, and there is uncertainty about where markets are headed.

That’s not highly unusual.

In this post we address a common question we hear when volatility is high and markets go down: When should I get in and out of the markets if they are falling?

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“Time in the market” – not “timing the market”

No one has a crystal ball to see how markets will move in the future – they often behave in highly unpredictable (typically short-term) but rewarding (longer-term) ways. It is extremely challenging to time the market consistently– to buy when prices are low and to sell when prices are high.

In the past, steep market declines have typically been followed by swift recoveries. Recent examples of this:

- At the onset of the COVID pandemic in early 2020, markets fell steeply, but recovered quickly as well.

- In the first half of 2022, markets fell significantly, but then recovered during July and most of August. They fell again in September.

Also, the best and worst trading days tend to cluster in brief and difficult to predict periods of time. So although it is tempting to try to trade in and out of the market during periods of market volatility, doing so also increases the risk of missing some of the best days in the market. That can have a major impact on returns.

If the past few months have shaken your confidence in staying invested, remember that there is a potential cost of getting out of the market. In the past 20 years alone, the S&P 500 annualised return has been9.7%, but missing just 10 of the market’s best days, which tend to occur within less than one month of the 10 worst days, would have reduced that annualised return to 5.5%. (Source:https://www.jpmorgan.com/wealth-management/wealth-partners/insights/big-market-swings-are-tough-but-staying-invested-is-crucial)

This highlights the real difficulties and risks of attempting to time the market. Ultimately, the biggest challenge in our view with trying to time the market is that you actually have to be correct not just once but twice.

First, you have to ensure you sell at the right time (i.e.at or near the market top). Second, you have to get the timing right in terms of buying back in at or near the market bottom. There is only a narrow window of opportunity for optimising both of these timings. History shows that for most investors, the likelihood of getting these moves right is pretty low. Even professional portfolio managers rarely get this right on a consistent and repeatable basis.

While obviously no strategy can guarantee a profit or protect against loss, history suggests that what matters most for building wealth in the long term is your time in the markets, not timing the markets.

‍When might you consider investing further funds?

As we’ve shared above, it’s very difficult to predict with certainty how the market will behave in the future. So if you’re considering investing further funds but feel uncertain about the ‘best’ time to do it, you may consider dollar-cost averaging. Dollar-cost averaging means investing funds at set intervals over time, regardless of what markets are doing. Investing funds consistently over the long term means you have more ‘time in the market’. It can also help to take the emotion out of investing and the temptation to try and time the market.

Note – This article contains general financial product information but should not be relied upon or construed as a recommendation ofany financial product. The information has been prepared without taking into account your objectives, financial situation or needs. For further details on Six Park’s service please see our Financial Services Guide athttp://www.sixpark.com.au. Past performance is not a reliable indicator of future performance.

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