Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It's true that market timing sometimes can be beneficial for seasoned investing experts; however, for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the best alternative.
Use time to your advantage
If you're not a professional money manager, your best bet is probably to buy and hold. Through a buy-and-hold strategy, you take advantage of the power of compounding, or the ability of your invested money to make money. Compounding can also help lower risk over time: as your investment grows the probability of losing the original principal declines.
Maintain a long-term perspective
When investing, it's important to have a good long-term perspective — and a clear understanding of how time affects the market and your investments. In short, how long you invest can make a real difference in the final result.
Change is a constant
It's important to know that the marketplace is constantly changing. The attached chart from Grosvenor Financial Services shows the market over time, as measured by the change in value of the various share markets since 1970. As you can see, there are ups and downs driven by changing economic, historical, and political forces. However, despite wars, depressions, and international crises, the NZ share market has risen substantially since 1970.
The right time to invest may be now
Many investors fear that they are investing at the wrong time — or that they should wait for a better time to start investing. There are always compelling reasons not to invest, as highlighted in the attached share market timeline.
The market has historically rewarded investors who have remained invested for the long-term — through periods of short-term volatility, market drops and spikes and other factors beyond the control of investors. However, it's important to remember that past performance of the share market is not an indicator or guarantee of future results.
Regular reviews are necessary
Buy and hold, however, doesn't mean ignoring your investments. Remember to give your portfolio regular “health checks”, as your investment needs will change over time. At Montage Financial Planning we believe annual reviews are required to ensure that the investments you select will keep you on track to meeting your goals.
Normally a young investor will probably begin investing for longer-term goals such as marriage, buying a house, and even retirement. The majority of his portfolio will likely be in shares and equity based funds, as history shows they have offered the best potential for growth over time, even though they have also experienced the widest short-term fluctuations. As he ages and gets closer to each goal, he will want to revisit his portfolio to rebalance assets as his financial needs warrant.
This hypothetical investor knows that how much time is available plays an important role when determining asset choice. Most experts agree that a portfolio made up primarily of the "riskier" share funds (e.g., growth, small-cap) may be best for those saving for goals more than five years away; growth and income funds and bond funds might be the main focus for investors nearing retirement or saving for shorter-term goals; and investors who see a possible need for cash in the near future might consider a portfolio weighted toward money market instruments. Remember, though, that even those enjoying retirement should consider the historical inflation-beating benefits of shares and managed share funds, as people often live 20 years or more beyond their last official paycheck.
Time In Market
Focus on time in the market and not market timing
Sports commentators often predict the big winners at the start of a
season, only to see their forecasts fade away as their chosen teams lose.