April 2, 2021
Should you invest now, or is it a good idea to wait and invest your money later? Is there a better time to invest in markets?
With the recent volatility in the financial markets, many investors are wondering if it is a suitable time to invest or if they should wait a while to see how things go? In this article, I will explore how market timing can impact your investment portfolio and help explain when it makes the most sense to put your capital to work in the investment markets.
The decision to delay investments that could be made today is a form of market timing which is the investment strategy of trying to buy low and sell high. It is the exercise of trying to invest after a drop in the markets or selling after a run-up hoping to buy back in again at lower prices. Trying to avoid the opposite of these would also be considered a form of market timing. In other words, not investing available cash due to a desire to avoid missing the bottom or to avoid investing at the top of a market cycle is market timing.
Market timing can make a lot of sense on paper. If consistently done successfully, there is no doubt that buying into the lows and selling at the peak of market cycles can certainly add value to your portfolio’s overall returns. On the surface, it seems simple enough. The problem is that market timing is extremely hard to do. And the downside to being wrong repeatedly can be absolutely devastating to your portfolio’s returns and to your confidence as an investor. Drastic or exaggerated deviation from your investment plan to follow a market timing decision is usually where things go wrong. Going all-in or pulling everything out of a market when neither of these investment allocations match up with your investment goals is where bad market timing can hit the hardest. In a worst-case scenario, it could erase years of positive returns and leave you believing that capital markets are a bad investment even if that is not true.
Most professional investment managers don’t try to time market cycles because they have learned that the direction of markets in the near term is very unpredictable. They may adjust, rebalance, or re-allocate capital based on where they believe they might be in a certain market cycle, but these are usually marginal changes and do not change their core investment strategy. What investment managers have learned is that short-term market reactions may be unpredictable, but markets tend to move up over time.
For example, as of this writing, if someone had invested in the S&P 500 Index of US stocks right before the COVID crash, on February 17, 2020, their return on holding that investment to today would be about 36%. Should they have been lucky enough to make that investment on March 16, 2020, that same investment would be worth about 97%. However, waiting until vaccination was well underway, and the economy was on the verge of fully re-opening say July 5, 2021, their return to date would be only about 4%. So, waiting too long costs them more than they could have gained hitting the “jackpot” of successfully timing the bottom.
In the end, market timing can be a risky strategy and markets tend to grow over time. It’s likely more prudent to invest your capital when it’s available rather than holding on until it’s a “better time” to do so. As per the example above, investing at the “worst time” before the crash was better than waiting and missing the boat as it sailed away into major gains. It’s the only way to win even when you’re wrong on timing. The downside of waiting too long just isn’t worth it. As the saying goes: “It’s time in the markets, not timing the market, that builds wealth.”
Marcel LeBlanc, CFP®, CIM® is a Financial Planner and Associate Portfolio Manager with Louisbourg Investments. You can find more from him on Facebook and LinkedIn. Comments or questions may be submitted to Marcel at firstname.lastname@example.org, or he may be reached at (506) 383-5204
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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.