You may have heard that timing is everything. And in many walks of life, that may be true – but not necessarily when it comes to investing.
To understand why this is so, let’s look at three common mistakes investors make:
Selling investments and moving to cash when stocks are predicted to drop – If you follow the financial news on cable TV or the internet, you’re eventually bound to discover some “experts” who are predicting imminent, huge drops in the stock market. And on rare occasions, they may be right – but often they’re not. And if you were to sell some of your stocks or stock-based investments based on a prediction and move the money to cash or a cash equivalent, you could miss out on possible future growth opportunities if the predictor was wrong. And the investments you sold still could have played a valuable part in your portfolio balance.
Selling underperforming assets in favor of strong performers – As an investor, it can be tempting to unload an investment for one of those “hot” ones you read about that may have topped one list or another. Yet there’s no guarantee that investment will stay on top the next year, or even perform particularly well. Conversely, your own underperformers of today could be next year’s leaders.
Waiting for today’s risk or uncertainty to disappear before investing – Investing always involves risk and uncertainty. Instead of waiting for the perfect time to invest, you’re better off building a portfolio based on your goals, risk tolerance and time horizon.
All these mistakes are examples of a risky investment strategy: trying to “time” the market. If you try to be a market timer, not only will you end up questioning your buy/sell decisions, but you also might lose sight of why you bought certain investments in the first place. Specifically, you might own stocks or mutual funds because they are appropriate for your portfolio and your risk tolerance, and they can help you make progress toward your long-term financial goals. And these attributes don’t automatically disappear when the value of these stocks or funds has dropped, so you could end up selling investments that could still be doing you some good many years into the future.
While trying to time the market is a difficult investment strategy even for the professionals, it doesn’t mean you can never take advantage of falling prices. In fact, you can use periodic dips in the market to buy quality assets at more attractive prices. Suppose, for example, that you invested the same amount of money every month into the same investments. One month, your money could buy more shares when the price of the investment is down – meaning you’re automatically a savvy enough investor to take advantage of price drops. While your money will buy fewer shares when the price of the investment is up, your overall investment holdings will benefit from the increase in price.
Buying low and selling high sounds like a thrilling way to invest. But in the long run, you’re better off by following a consistent investment strategy and taking a long-term perspective. It’s time in the market, rather than timing the market, that helps keep portfolio returns moving in the right direction over time.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.