Timing the market is something that is very important – if you are day trading. When investing for long term growth, timing the market is not nearly as important. Most would say timing the market is an absolute must in order to see gains. In fact, I would say the exact opposite. It is not that important at all for long term investing!
How can this be? – Timing the Market in Long Term Investing
Timing the market is very difficult. There are only a few factors that can help you determine the most effective timing. These include technical analysis, market psychology and economic new. Not even the best portfolio managers out there can detect where a particular equity is heading, its a tough challenge. In order to time the market it takes a lot of time to monitor and follow the continuously changing trends. Instead of waiting for the perfect timing, it would be much better to just get in. If you are waiting for an opportunity for an equity to drop, you can potentially lose out on some significant gains and waste valuable time. The question then becomes, what if I jump in and the equity I have purchased drops in value?
This is OK and does happen. The key to long term investing is that your equity might be low for today and who knows, maybe even the next whole month or two. However after a lot more time has elapsed everything will even out. The truth to this thought is that the exact same thing can happen when trying to time the market. You may jump in when you thought the equity is on the rise just to find out that it turned for the worst again. We can call this the natural risk of investing.
A Market Timing Example – Timing the Market in Long Term Investing
The currency of an equity I want to purchase is too strong. Should I wait?
The perfect example of this is when I purchased a lot of US ETF’s at the end of 2016 and beginning of 2017. Of course this was done by exchanging Canadian funds to US funds. The US dollar was very strong at this time where I paid $1.36 for every $1 american. My not so trigger happy emotional decision making process was telling me to wait, however I must to honor my rules of investing. One of the rules to long term investing is of course to not attempt to time the market.
Now, I want you to understand that when I bought in, I knew that the US to CAD dollar was going to weaken over time just because of the specifics in the economy. I didn’t know exactly when this would happen but I did figure it would be sooner rather than later. I clicked the buy button!
One year later the Canadian dollar is sitting at $1.24 for $1 US which equates to a loss of around 9%. That’s a lot isn’t it? At this point you might be thinking I’d be so much further ahead by waiting that out or buying something else. After all, I did know this was going to happen.
However, good thing I followed my rules for investing. It turns out that over the exact same timing from when the US equities were purchased to the point in time when the US dollar hit $1.24 CAD, my US equities were up just over 20%. Let’s assume 20% for simplicity. That’s a net difference of 11%. (20-9) I totally didn’t see the US market doing so well, especially since it has been just about 10 years after the housing disaster of 2008.
Summary – Timing the Market in Long Term Investing
Timing the market is very difficult. Leave this to the day traders or the ones that are exposed to some serious risk. The only time to to hit the buy button is now, TODAY.
If you are the type to make decisions emotionally, long term investing is for you! No need to stress yourself out. That is truly the beauty of a long term, balanced and diversified portfolio. Don’t let emotion take over, and certainly Do Not Time the Market!