The chart below is an excellent example of what spending time in the market with a good investment strategy will do for your investment returns. Market timing is just about impossible to achieve with regularity over a long period of time, and successfully.
The problem with timing the markets is that it usually comes down to a feel, guesswork. Nobody can ever know what the markets will do next. So if that is true then timing the markets must be guess work, and behavioural finance theories tell us that this guess work is usually based either on the herd mentality or ego and emotion. This is all starting to sound like a recipe for failure.
Take 2008. A good time to come out of the market and sit it out I think we would all agree. If you were the only person in the world foresighted enough to sell at the beginning of 2008 just before the credit crunch and subsequent recession, and move to the safe haven of cash while all the madness ensued, look at what all did actually play out…
I should say that the chart has been produced by 7IM and they have used their AAP Balanced fund as a proxy for general market movements. This is in no way an endorsement of the 7IM AAP Balanced fund. But it is interesting.
- The blue line shows what you would have earned if you sat the whole thing out.
- The red line shows what you would have earned had you panicked and sold when it was looking ‘pretty bad’.
- The black line shows what you would have earned if you had done nothing and stuck to your strategy.