Why timing drives investment success

Ben Nash

What is market timing?

Market timing involves choosing the very best time to invest money. Like Marty McFly in back to the future, if you could know in advance when the price of an investment was going to be highest and lowest and then buy and sell and make a profit in the process.

Sophisticated investors, advisers, and fund management teams use complex financial models which factor in economic conditions, activity, investment market conditions, and general forecasts and predictions about financial markets to make ‘informed’ decisions and assist them in timing the market.

Market timing is often a shorter term investment strategy, due to the fact market conditions change over time which can impact the suitability of the investment you are trying to ‘time’.

The thing with market timing is that it actually sounds simple – you figure out what is happening in the world or financial markets and how this is going to impact the stuff you want to invest in, then set up your investment strategy and off you go! I think this is the reason many people get caught up in the hype and then end up getting their market timing wrong.

Advantages of market timing

If you can successfully ‘time the market’, it will mean you would know when an investment is ‘cheap’, and also avoid purchasing investments when their values are high. This can be a powerful way to make money if you’re able to consistently get it right. If you’re able to consistently get it right.

How to use market timing when you invest

To use market timing to your advantage you should actively adjust your investment strategy based on research and activity in global and local economic and financial markets. You then monitor your investments and again actively adjust your strategy based on changing market conditions.

Risks of market timing

One of the biggest drawbacks of using market timing as a strategy is that it’s really difficult to get right. Globally there are numerous investment houses, corporations, and high net wealth investors that incorporate market timing into their investment decisions. Results are often mixed, and I think important to note the fact it’s quite rare for investors to consistently get this right over an extended period of time.

Recent research from global investment giant Vanguard shows that over a five year period, less than 15% of professional international fund managers are able to make these investment decisions correctly. These are multi-billion dollar firms with entire teams of people dedicated to only doing research on what the best investment decisions will be.

To me this suggests that if these guys can’t get it right, the average investor or the average adviser will struggle to do any better.

The things with investment markets that many people often forget is that there is a lot of money in the world, and there are actually loads of investors with heaps of money that are just waiting for the perfect investment opportunity. These people keen investment markets honest.

If it was as simple as just doing the research and then knowing how to time the market, these investors with piles of cash would just do this and make bunch of money. Sounds too good to be true right…?

The reason timing doesn’t work as often as it should is because the people that invest in markets are people – that means they sometimes do crazy things. Unpredictable things. Emotional things. Things that just don’t make sense.

This means that the best investment or timing strategy can breakdown and fail, and if you’re caught in the middle of a bad decision or irrational moment you’re the one that will pay the price. Unfortunately, Marty McFly is a fictional character, and we don’t have an almanac to follow to tell us where and when to invest to make the most money.

If you get your market timing wrong it will mean buying at the wrong price and the wrong time, and selling at the wrong time and price, and as a result lose money on your investment.

When you invest and in particular when you’re first getting started investing, getting that initial traction and momentum in your portfolio is often the most difficult. Once you’ve built a solid base you build up momentum and it becomes easier to start making steady progress with your investments.

If you make poor investment decisions early on in your investment lifecycle, it will set you back and mean it takes you much longer to build that initial momentum. Even worse, if you get bad results early it can mean you get fed up with investing and then don’t make the progress you should with your money.

To this end it’s important to use solid investment techniques from the start.

What’s the alternative?

The alternative to market timing is to invest based on your long term goals and investment objectives. In this alternative strategy, you set up your investment goals and timeline, and understand that you’re probably not going to always invest at what would be considered the ‘perfect’ time for investing.

In this far-out alternative investment technique, you also understand that if you invest smart and avoid making poor investment decisions, you’re likely to get a much better investment outcome over time if you avoid making poor investment decisions. If you’re ahead of the class you might even understand that if you invest regularly over time, occasionally you will perfectly time the market – and you will understand this will be by chance.

I call this alternative strategy ‘Successful Investing’.

You can use this strategy to avoid investment mistakes and failure and create lifestyle options. To do this, follow the steps below:

  • Clarify your investment goals – what do you need to or want to get out of your investment?
  • Understand your timeframe – to help you determine what investments will be suitable to achieve your investment goals as above
  • Choose the right investments – these are not going to be ‘the next big thing’ or some hot tip you heard at a dinner with mates, but investments that have a good chance of long term returns
  • Be consistent – this means ideally invest regularly so you get the benefits from both rising and falling markets and invest in a manner consistently with goals and strategy
  • Avoid following the herd – this is where you can run into real trouble so if you’re likely to get emotional think about buddying up with an friend or adviser to help you out
  • Measure & review – check your results are consistent with your plan and what you’re trying to get out of your money

Common Roadblocks

Having seen many people try to do this themselves with varying levels of success, I thought it worth noting the areas most people fall down. These same areas are those I think you can really benefit from having a buddy that really knows what they’re talking about or good Adviser to help out

  • Investment selection – you need to understand what are the right investments for what you’re trying to do and how to avoid poor investments
  • Your timeline – you need to get crystal clear on what’s possible and within what timeframe so you can confidently invest
  • Avoiding emotion/herd behavior – you should take the emotion out of investing so you don’t follow the crowd all the way to investment failure

If you want to invest successfully to create lifestyle options and avoid making bad investment decisions, you need understand investment or market timing and how it does or doesn’t fit within your strategy.

Do this and you’ll avoid investment problems that will hold you back from getting the outcomes you should. Don’t make the mistake of thinking you’re Marty McFly!

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