With the recent market volatility in the last year some investors are wondering if it may best to sit out of the markets and wait for things to change. As a long-term professional in the investment industry, I can share that trying to time the markets is nearly impossible and often more damaging in the long term. To put it into simple terms, investors need to be right twice – once when they decide to exit the market, and again when they decide to get back in – I can assure that this is something only best looked at in hindsight and not a reasonable strategy.
Part of the issue of market timing is that it is often fraught with high emotions for the investor. Typically, an investor chooses to get out of the market after a stretch of volatility or a period where there are concerning headlines. In this case, the investor likely has experienced some form of negative return and the reaction to sell out of the market is to avoid future losses. This reaction tends to be due to the underlying fear that the loss will be greater and more painful than what they have experienced already. In this, the investor is merely looking to sell to avoid future possible pain and or provide relief in the interim. The decision here is therefore emotional, and not based on a long-term strategy.
Assuming that the investor falls prey to these overwhelming emotions and does get out of the market, they may justify their actions with a plan to get back in at a future point when the headlines aren’t so difficult, or the markets are acting more favourably – essentially ride out the storm and wait for sunnier skies. The problem becomes that getting back into the market is also an emotional decision whereby the investor is now fearful of getting back in too early, or possibly too late after the markets have rallied substantially. All too often, the markets turn back towards the positive and the investor misses out on some of the best returns. In this case, the damage done is that the investor never fully recovers back any of the losses from before.
The problem with the markets is that no one knows exactly what is happening in the very short-term. While an individual can analyze and provide insight into what one thinks may happen, the reality will no doubt be different. The point being that markets can go a lot higher even if the headlines spell doom and gloom. The rationale behind this is that markets are forward looking – meaning at any point the markets are focused on what could happen in the next 6-18 months, rather than what has happened in the past.
Taking all of this into consideration, if an investor plans to get out of the markets because there has been negative news, or even an assumption that this news will get worse, the markets may not act exactly as one may predict. Since the markets tend to move in large swings the chance of missing out on some amazing returns may be very profound and possibly permanently damaging.
Finally, often the strategy that provides the best rewards is to try and avoid market timing altogether and to continue to remain invested, as emotionally difficult as it may be. With this said, investors should review their individual holdings and ensure the investments they hold will sustain any prolonged market or economic downturn. This may not be perfectly clear at the time and likely requires the assistance of a professional Wealth Advisor. The thinking here is that investors shouldn’t avoid risk, but instead manage through it.
While timing the market may seem straightforward the biggest pitfall tends to be the emotional impact it has on the decision-making process and the likelihood of permanently locking in losses or missing out on very good returns. Investors are likely far better off staying invested and focusing on long-term results rather than short-term irrational market movements. A Wealth Advisor will be your guide through these volatile markets.
Derek Fuchs is a Senior Wealth Advisor and Portfolio Manager with Scotia Wealth Management based in Red Deer. He writes this column to help educate and inform local investors. Have a question? Email Derek at derek.fuchs@scotiawealth.com anytime.