Many investors continuously attempt to play a trick on the markets by trying to buy or sell securities just at the right time. But most of the time they achieve the contrary.
Now why is this?
The temptation is huge because nowadays it’s just at the click of a button and you can buy or sell securities within seconds via the Internet.
Especially a lot of beginners tend to think: why not take advantage of the up and down swings of the markets? Sell now while the markets are up and wait for a consolidation to get in low again!
Now you can do this if you’re a short-term trader. But it’s not advisable being a long-term investor!
For some beginners, the hunt for the right entry and exit points has already become a time-consuming hobby. They watch the markets meticulously at their computers day in and day out and are ready to click away at their mouse in order to get in or to get out quickly at the right time.
Easier said then done!
It’s understandable that investors try to avoid bad market times – all the more after experiencing the tumble at the turn of the century. According to a survey by the mutual fund company Fidelity, in the long run profits of a portfolio increased substantially for whom it was possible to avoid the bad market days.
If in the last 15 years you were fully invested in Dow Jones stocks or even in the 30 DAX companies – which is the German counterpart of the Dow Jones – the profits in your portfolio would have been up on average by 11.6% per year with the Dow and 9.7% with the Dax. But if you were able to avoid the 20 worst trading days during the same period, your profits would have soared at around 19.2% per annum.
Now that’s a difference of 7.5% on the Dow and 9.5% on the Dax and it all sounds pretty well and good. The problem is though, nobody can predict for sure and unerringly when the stock market is going to be at it’s peak to get out quickly and when it’s going to be down the valley to get back in low.
So when is the right time to get in and out? When a security makes 10% in one day or when it loses 10%? When it makes 3% in 5 consecutive days or when it loses 3% in 5 days? Or does a sideways trend or a channel formation signal that it’s time to get in or out? You can never tell with absolute certainty because at the end of the day it’s all pure speculation!
The second problem is, answering the question when to get back in after you got out high or just before a consolidation. You see, a lot of investors hesitate for too long before getting back in again missing the new uptrend. Mostly the greatest gains take place after a stock has dropped sharply.
In the long run it’s hopeless and futile trying to outsmart the markets by means of clever and canny timing because if you try to avoid bad times, you’ll probably also miss the good times because after a consolidation, most investors are hesitant to get back in again being afraid that the markets could go down again or that the initial upswing could be a bull trap, which means that once a turn around to the up-side is signaled, the market quickly turns in the opposite down-side again.
By just missing the 20 best days of the year according to Fidelities survey, your total profits in your portfolio over the same 15 year period would have only been 5.5% per annum on the Dow and 1.3% on the Dax. So you would’ve lost out on an extra 6. !% per year on the Dow and 8.4% on the Dax. And that’s big money! So as you can see, the effects of missing the good times are immense!
Staying fully invested, you will gain way more than you would by selling your stocks in between hoping to catch the right timing to get back in again.
Now I’ve got to point out one little thing here. If you’re a short-term trader, timing does play a big role because a trader wants to get a chunk out of a trend that he’s trading. So as soon he sees a signal for the trend to go opposite, he bails out. That’s perfectly OK and it’s also the right strategy to use if you trade options or other derivatives.
But if you’re a long-term investor with a well diversified portfolio, there’s absolutely no need whatsoever to continuously jump in and out of the market because that has nothing to do with long-term investing.
Investors that attach great importance to timing and believe they can outsmart the markets have to make an immense effort to achieve good results that, at the end of the day, will not necessarily lead to the success hoped for.
Wishing you all the best financial success!