At one time or another, every investment professional has probably received a call from an investor who wants to know what the “hottest” investment is, and what he or she can do to get in on it. While it can be quite tempting to jump on the bandwagon after a highly publicized IPO or when a company comes out with a hot new product, investors should be careful about trying to time the market or
To avoid making a move that may have a drastic impact on their investments,
investors should remember a few basic fundamentals of investing. The first of
which, we’ve heard time and time again, is to buy low and sell high. Seems
logical, right? Unfortunately, many investors find themselves falling into the
trap of wanting to take advantage of a popular stock. Because of the stock’s
popularity, they may find that it may be overvalued and perhaps they are paying
more than the stock’s true value.
During periods of market volatility, many investors’ natural inclination is to take their money out of the stock market and park it in more conservative investments to avoid subjecting themselves to a decline in the value of their investments. While this may make sense in theory, attempting to time the market can have
significant financial repercussions.
The biggest potential pitfall in trying to time the market is missing the days it’s
“up.” In fact, if you had missed the stock market’s 10 best days over the past
decade, you would have lost nearly 5% of your original investment.
The temptation to time the market is understandable: If you were invested on days when the market went up and out of the market on “down” days, you would earn the best return possible. However, moving in and
out of the market fails to take into account the negative effect of income and
capital gains taxes. Even if you could predict the market’s movements, the frequent buying and selling would diminish your return.
One thing that most experts can agree on is that determining the “best” time to get in or out of the market can be nearly impossible, and that for most investors, trying to time the market is not a practical investing strategy. Trying to determine exactly when one should aggressively invest or back out of the market takes a considerable amount of expertise and time to monitor market environments. Even the most savvy investors and advisors can’t guarantee that their predictions will be correct, since there are no guarantees when it comes to how the financial markets will perform.
There’s only one strategy to ensure capturing the best days: Remain invested for the entire period. Successful investing requires a long-term
approach and a willingness to endure market volatility from time to time.
Contact your investment professional for more specific guidelines on how to avoid
“performance chasing” and trying to time the market.
submitted by: Kathleen M. Zelenka, Stifel, Nicolaus & Company,
Kathleen Zelenka is a Financial Advisor with The Gormley/Furlong Group at Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, and can be reached by calling the firm’s Yardley office at (215) 504-1665 or toll-free at (800) 223-7635.