Why Market Timing Can Have Detrimental Effects on Investments

Background of stopwatch in front of graph

The investing world has been fueled with fear about a looming recession, supply chain issues, labor shortages, and bear markets; OH MY! When the world gets crazier and the markets seem to get more volatile, many investors start to wonder, “when should I get out?”. However, timing the market is challenging for even the most experienced investors.

Market Timing is Not Easily Achievable when Investing

Often, investors think that being able to predict or time the market on the downside will leave them in a better position because they will not lose more money as the market continues to fall. This conceptually makes sense; if you can sell your investments and the market continues to fall, you will have more capital to buy back in at a lower price. However, there are major problems with this practice. Not only are you trying to time the market on the exit but now you have another major decision to make, when to get back in.

Historical data can teach us about our past and allow us to learn from our mistakes. Investors should not be ignoring this information. Using the S&P 500 as an example, there is a significant amount of evidence that shows investors who miss time the market on either side will wind up with detrimental effects on their portfolios.

Poor Timing can Cause your Investments to Lose Money

What’s the difference between market timing and investment selection? The answer is that you are giving up control of your investments with market timing.

You’re deciding to move your money based on how the markets are performing at a given time rather than staying invested in stocks or bonds until they’ve risen enough for you to make a profit.

There are two main types of market timing short-term (intraday) and long-term (interday). Short-term involves making changes in your portfolio within minutes or hours, while long-term involves changing tactics over days or weeks.

Unless you have the foresight, research suggests making major portfolio changes around market highs or lows is not a best practice.

Other Factors to Consider when Investing

If you’re planning on investing in the stock market or any other form of investment, property, or business, you must be aware of all the factors involved.

You also have to consider tax implications, your overall investment goals, and how much risk you are willing to take on.  Of course, a full background check on a company and its competitors is also necessary, especially when you are dealing with riskier options, like stocks.

RVPII Consulting works with high-net-work business owners, families, and real estate investors to create customized financial plans to meet your needs and goals.

Some Final Thoughts on Market Timing

Now and then, it can be tempting to jump at a quick investment that sounds like it might pay off big down the road.

Ultimately, if you think the time is right, then you should pull the trigger. Still, you should never act without doing your homework, speaking with a professional, and considering all the other factors involved in making a successful investment.

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