Timing an entry into falling investment markets has been described as trying to catch a falling knife – if you are not very careful, you are likely to get hurt.
Investors risk grabbing the falling knife, or investing in a falling stock market, too early and therefore grabbing the blade rather than the handle.
If you time it right of course, the results can be extremely rewarding.
We all like to grab a bargain, and investing in an asset at the bottom of its price range can feel a lot like you have landed the bargain of the century.
Unfortunately it is nearly impossible to accurately time the market.
Catching a falling knife (in investment terms) is trying to time the market. The trouble with this strategy is, you are more likely to invest at the wrong time than you are to invest at the best time.
Potentially a bigger risk associated with trying to time the market is that you miss out on some of the best days of market returns.
In their research looking at a number of bear markets, Fidelity found that missing out on only a few of the best days can have a dramatic impact on the returns you get from your investment portfolio.
Fidelity found that £1,000 invested in the FTSE All-Share in October 2000 would have grown to £1,330 by October 2010.
Had an investor missed ten of the best days in this ten year period, the return would have been £720.
The return would have fallen to £475 if the investor had missed the 20 best days in this time period.
Trying to catch a falling knife is a high risk investment strategy. It is usually always best to invest and remain invested, rather than risk investing too soon or not soon enough.
Photo credit: Flickr/cogdogblog
