Market timing is an important issue when it comes to investor behaviour.
Despite evidence to the contrary, there’s often a temptation to try and time the markets when they are volatile.
The goal here is simple; sell before the markets finish falling, and then buy again before they finish their subsequent recovery.
The trouble with this approach is there’s no way of knowing when the right time is to sell and subsequently buy.
You could end up selling when the markets are at or near their bottom, before buying again when markets are at or near their top.
Repeat this process enough times and you run out of money.
Add to this challenge that history tells us market recovery following a correction tends to happen swiftly, with the bulk of gains concentrated in just a handful of days.
Find yourself out of the market when this concentrated period of recovery takes place, and you are likely to experience significantly lower long-term returns.
So instead of attempting to time the markets, we explain to our clients the importance of time spent in the markets.
Invest and stay invested is the right course of action, if we accept that our investment market crystal balls are useless.
Earlier this week I spent some time chatting to clients about their investment strategy in retirement.
We spoke about how we model a 20% investment market correction, with no subsequent recovery, into their lifetime cash flow forecast.
The logic behind this modelling is to demonstrate that, even in the event of this extremely unlikely scenario, they would be alright financially.
Experiencing a 20% investment market fall with no subsequent recovery is one way to lose money when markets fall. But it’s unlikely, as the vast majority of us would expect (in time) a market recovery to follow a market fall.
A second way to lose when markets fall is to sell everything.
This outcome is far more likely than the scenario of correction and no subsequent recovery, but it is entirely within the gift of the investor.
It’s why we model such a scenario in our financial plans; not because we believe it will happen in the markets, but because we believe it could happen as a result of investor behaviour.
It could happen because it’s natural as an investor to feel spooked, uncertain and generally nervous during times of market volatility.
As much as we all like to think that we can be zen-like and entirely passive when the markets seem to be collapsing around us, that’s not the real world.
You can improve your prospects for behaving well during a market correction in a number of ways.
These include working with a financial planner who also serves as a behavioural coach to keep you on the right course.
It helps too if you can link the management of your investment portfolio to the goals established in your financial plan.
But let’s not fool ourselves that staying the course is ever easy. And that’s why we factor such an outcome into the plans we build for our clients.
When equity markets fall, you can guarantee no subsequent recovery through the choices you make Share on X