"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
Peter Lynch, Mutual Fund Manager
During periods of heightened financial market volatility, and increased levels of uncertainty, it can be tempting to try and time the market by selling assets and then buying back at a later stage. However, timing the market is virtually impossible, even for the most experienced investors. This is why it's often said that time in the market is more important than timing the market.
Investors can often get too emotional about the decisions that are made by panic selling during the ‘bad’ times and going on a buying spree during ‘good’ times. Having such a short-term horizon can harm performance and jeopardise your long-term financial objectives.
History shows us that there have been six major crashes in the past 30 years, causing panic selling and so psychology plays its part;
- Black Monday (1987)
- Asian economic crash (1997)
- Russian economic crisis (1998)
- Tech stock crash (2001)
- Global financial crisis (2008)
- COVID-19 sell off (2020)
Behavioural finance studies and specifically Prospect theory, suggests that investors are more likely to focus on gains rather than the perceived risk of loss when the outcome of an investment is uncertain. This could be the reason as to why many investors panic sell, as the fear of a loss outweighs the elation of ‘winning’. Furthermore, this is also a reason why investors are always encouraged not to check in on their investments daily.
Those attempting to time entries and exits may actually fall short as the pace at which markets react to news is quick, meaning stock prices have already absorbed any impact positively or negatively. Timing the market is predicting the future and you could end up being out of the market when it unexpectedly surges upward, potentially missing some of the best performing days.
No one can consistently pick the best or worst days of the year, so this is why it can be so dangerous for investors to miss time in the market by trying to time the market. If you miss one or two big days, compounded over time, this can greatly impact your portfolio!
With thanks to our partners LGT Wealth Management
17th June 2022
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