Remember the last time you had a bad cold? You had ached all over, and was stuck in bed. You felt like the flu bug would never go away. Yet, after a few days, you do get better and eventually recover. Were you able to tell exactly when your nose would stop running or you would fully recover? Not really. Similarly, no one can predict the future accurately, or tell when the stock market has bottomed. And yet does the stock market eventually recover? Yes, it eventually does so1.
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)2.
And timing the market to invest would be akin to trying to predict a pet’s zoomies.
What’s timing the market, really?
What IS the stock market and what does it mean to time it? The stock market is but prices that are made up of millions of opinions. And they are opinions of how much a particular business is worth at a particular point in time, and participants shout their opinions by creating demand by buying and generating supply by selling the company’s stock, thereby determining their stock prices. And the movement of the stock prices in the short-term distracts the investor from what is important. Timing the market entails making predictions of when the market has bottomed or peaked in order to buy in or sell respectively.
Timing the market by forecasting to buy or sell is actually being controlled by the mass majority. Why should share prices that are easily available on the internet form the basis of one’s decision to buy or sell the shares?
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.3” 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.
We might have an urge to time the market so as 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.
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. In fact, Sir Isaac Newton, the renowned physicist, was known to have fallen folly to such a mistake. He was an early investor into a stock called South Sea and had liquidated all his holdings at a good profit. However, when the bubble kept inflating, Newton jumped back in almost at the peak, thinking he could profit more. Eventually, the bubble burst. If he had stuck to his guns, he would not have seen the stock he bought in again end up losing more than 75% of its peak price4.
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.
In order to reduce the emotional volatility of investing, DCA can be adopted. When you invest equal sums of money regularly on a set schedule regardless of the price of the equity, it removes the emotional elements and desire to time the market.
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 for us 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? Do strategise as soon with your Unicorn Financial Consultant.
2.Analogy by Ralph Wagner, The Good Investors
3.The Intelligent Investor
4.AIP Publishing, American Institute of Physics
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