Timing the Markets

Time or Timing in the markets

How important is it for investors to time the markets?

I know a retired man who cashed up his superannuation to purchase a car at a time when the markets were running hot. This was in February 2020 just as covid-19 was starting to spread throughout the world. The following month the markets started to slide. I told him, “no wonder you are smiling.”

That was good luck rather than good management, but you could consider it good timing even though it was a fluke.

There are other cases of investors who were not so lucky.

One was an investor who changed from growth funds to conservative funds during the market slide only to find that they missed out on all of the gains when the market recovered, losing them thousands.

Another is an investor who used some of their retirement funds for a deposit on a house as they are able to do with kiwisaver, the New Zealand retirement savings scheme. That sounds fine, but they withdrew the amount they were able to during a time when the markets were falling and the losses were said to be fifteen grand. Just like the other investor who changed funds this investor also missed out on the gains when the markets recovered.

The property market in New Zealand went crazy during 2020 due to the number of New Zealanders returning home and buying houses. A lot of people jumped on the property buying bandwagon. It is the F.O.M.O factor at play here. FOMO, for those who don’t know stands for, “Fear of missing out.”

One common theme coming out of all of this is that the property market is out of reach for first home buyers. It is still important for people to build up their asset base and find alternative ways to invest their money because having assets behind you puts you in a greater position financially for whatever is down the track.

The key to investing is to do it the right way. You wouldn’t invest in growth funds if you were going to use the money for another purpose in the short-term because the markets could take a fall just prior to you withdrawing the money. On the other hand if you have time on your side then investing in riskier funds may be an option if you have the temperament to handle the volatility.

An investor needs to decide whether this money is going to be used in the long-term, medium-term, or short-term and set their goals accordingly. An investor’s risk profile is another factor to consider; it is easy to be an investor when the markets are going up but if the rollercoaster ride of growth shares is going to cause you to lose sleep then you need to be a little more conservative.

The investor who switched to more conservation funds when the markets were heading south and missed out on the gains when they recovered allowed their own emotions to get the better of them. It is important for investors to get over themselves and train themselves to invest with the right mindset.

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