All You Need to Know About Market Timing
The financial markets have myriads of investable opportunities, but it remains a tough call knowing when one can actually execute an investment decision. Time is a crucial element towards solid gains in the markets. However, investors have found themselves timing the markets for small term to medium term gains. The major risk associated with this habit is markets are hard to predict and often an investor will be outdone by the market while timing it.
Short term investors opt for timing to ensure maximal gains from market volatility and existing market plays. On the other hand, long term investors hold their positions over time without the need to actively monitor their portfolios. As a result, long term investors outperform short term investors. The latter expose themselves to more risk and investment dilemma that allows a rollercoaster of emotional investing. The assertion that long term investors miss out on volatility plays is myopic and a recipe for validating the behavioral timing of markets.
The frequent entries and exits of positions by short term investors guided by predictive analysis lead to underperformance due to reasons such as transaction costs and commissions incurred. A long-term investor will spend less in fees and associated costs like tax hence more viable for wealth building. Keith Banks, the Vice Chairman and Investments Solutions Head at Bank of America stated in his 2020 interview with CNBC that “it is the time in the markets, and not timing the market”. This shows there is more gains to be made when one stays invested in the markets compared to the random timing type of investing.
Market timers risk missing out on critical market moves and long-term plays unlike long term investors. Long term investors find themselves in gainful market moves, whether bearish or bullish, they will have little to no urge to be right. Instead, the long-term investors flow with the market allowing themselves to reap gains of the compound effect on investments.
Summarily, timing in the markets could work for the short term but will most often be outperformed by long term investing. Frequent investing that translates to trading presents more risk and potential losses alongside draining one’s mental state. It is therefore, advisable that one invests in long term positions that offer more peace and room for maximal gains with less risk and effort. Importantly, do not wait for a right time to get in the markets instead, consider whether a buy or sell decision aligns with your checklist before executing an investment opportunity.
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