Timing Markets Isn’t Everything

Timing Markets Isn’t Everything

over 3 years ago2 mins

Mentioned in story

Perfectly timing markets is the philosopher’s stone of investment: theoretically lucrative but practically impossible, and unlikely to drop into even the greatest wizard’s pocket. So while spot-on selling and buying of US stocks would have doubled your money in 2020, it’s reassuring to know that a few super-simple strategies have also delivered impressive returns… ⚡️

What does this mean?

To paraphrase Albus Dumbledore, men (and women) have wasted away before stock-trading screens, entranced by the thought of buying and selling at just the right moment – or been driven mad, not knowing if such perfect timing is real or even possible. And perhaps that’s understandable: shorting the US S&P 500 at the start of the year and then buying as the market hit its March 23rd low would have turned $100 into $198, thanks to the stonking subsequent rebound.

Central bank “liquidity” boosts plus super-low bond yields equals investors buying stocks
Central bank “liquidity” boosts plus super-low bond yields equals investors buying stocks

Why should I care?

You shouldn’t. In reality, nobody – not even Nicolas Flamel – will have timed their stock investments this year to perfection. Trying to do so, or panicking in market maelstroms and messing with a well-designed portfolio, is likely to end in tears. Happily, however, the most straightforward of approaches have also done pretty well by investors in 2020 🤗

If you simply bought into the S&P 500 on New Year’s Day, for example, you’d currently only be 1.5% down for the year. Quarterly dollar-cost averaging, meanwhile (see our Investing BasicsPack for more), would have turned $50 in US stocks on January 1st and another $50 on April 1st into $111.

Even a more diversified 60/40 split between the S&P 500 and long-term US government bonds would have seen $100 at the start of the year become $106 now; not a bad return over five months. Add in a simple rebalancing at the start of the second quarter – selling what’s risen and buying what’s fallen to return to the target split – and you’d be sitting on a tasty $108.

The 60/40 approach is now all but back to its February highs
The 60/40 approach is now all but back to its February highs

The moral of the story? True philosophers avoid fretting over timing – and instead trust disciplined diversification to work its magic 🧙‍♂️

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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