Market timing, or trying to predict when the market will go up or down, seems like an attractive strategy.
The idea is simple: buy when prices are low and sell when they are high. In theory, this approach could help you lock in profits and avoid losses.
However, in practice, market timing is much more complicated and can often backfire.
The equity market is influenced by countless factors. Global events, interest rate changes, company earnings and investor sentiment.
Trying to predict when these factors will cause a market shift is incredibly difficult.
Research shows that even professional fund managers, with all their resources and expertise, often struggle to outperform the market by attempting to time it.
Studies have found that investors who jump in and out of the market frequently underperform those who simply stay invested long-term.
One of the biggest issues with market timing is emotion. It is human nature to feel fear when markets are down and excitement when they are up.
These emotions can cause investors to sell in a panic during a market drop and buy at the peak during a rally, leading to poor investment outcomes.
History shows that some of the largest market gains occur shortly after significant drops; meaning if you withdraw your money too soon, you risk missing out on those recoveries. Selling may also cause capital gains tax to be triggered.
Trading too frequently could potentially result in the profits being classified as income and not capital, resulting in higher taxes payable.
Instead of trying to time the market, a long-term "buy and hold" strategy is often more effective. This approach means staying invested through the ups and downs, allowing time to work in your favour.
While market fluctuations are inevitable, the equity market has historically trended upwards over the long term. Contributing to your investments on a frequent basis is an excellent strategy to manage these market fluctuations over the long term.
So, rather than trying to predict the unpredictable, focus on building a diversified portfolio and staying committed to your long-term financial goals.
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