Last updated on July 2nd, 2021 at 04:05 pm
Are you trying to figure out if you should time the market or not? Read this article to learn why timing the market is a bad idea.
Nowadays, most financially savvy folks know that one of the worst things that you could do with your savings is to simply let them lie in a savings account. Few, if any savings account will outpace inflation, so the only thing that’s really happening is that your hard-earned dollars are getting eaten away.
The solution, then, is investing. However, investing trades added risk for added reward. Many an excited young investor has fallen victim to the whims of the stock market, losing his or her shirt in the process.
Those investors that try timing the market are among those that frequently fail. If you’ve started to think about timing the market as an investment strategy, then you’re in the right place.
In this article, we’ll explain to you the dangers of trying to time the market, and what to do instead.
What is Timing the Market?
First things first: before we get into the nitty-gritty of why you shouldn’t time the market, let’s make sure we understand exactly what timing the market is.
The stock market, as most people know, is cyclical. There are periods of great growth (such as in recent years), as well as years of great stagnation and even crashes (such as the Great Depression).
All economic theory supports the idea of a cyclical market. The question then arises, then, if one could predict when a bear market is going to turn into a bull market and vice versa, couldn’t one see massive gains?
In theory, that makes sense. But in practice, it simply doesn’t work.
Why Shouldn’t I Time the Market?
Yes, the market is cyclical. However, predicting a market’s cycles simply isn’t possible. This is due to the fact that a wide myriad of factors go into what makes the market turn up or down. If timing the market were possible, then everyone would be doing it!
In addition to that, consider transaction costs. Trying to time the market means a lot more transactions than a normal long-term investor would make. The commissions that brokers charge on these trades will eat into any gains you would have otherwise made.
What Should I Do Instead?
To avoid a market timing failure, here’s what you should do instead. The best way to succeed in the stock market is to develop a sound long-term investment strategy with a healthy, balanced portfolio.
You can avoid getting burned by a downturn in a cyclical market by not concentrating all of your savings on stocks. You can also invest in real estate or in bonds. As the old saying goes, “don’t put all your eggs in one basket”. That proverb is never more applicable than when considering investment strategy.
Healthy, Balanced Portfolios Are the Key to Investment Success
There you have it — all the reasons why timing the market isn’t the way to go. With a healthy, balanced portfolio, you stand a much better chance of making out with profits in the long run.
For more financial advice, be sure to check out the rest of the articles on the website!