Sudden ups and downs in the stock market can be hard to ignore. It’s common to get the urge to sell when you see your investments lose value — or to buy when the market is surging. But predicting the effects of short-term market movements like these is nearly impossible. And efforts to “time the market” can backfire, undermining your ability to grow your savings. If you sell right after the market drops, for instance, you’ll lock in your loss and potentially miss out on a subsequent rebound.
Despite the harm you can do to your portfolio, the urge to time the market can be hard to resist in times of volatility. Here are four considerations to help you practice restraint in the face of short-term market movements.
Fall back on your long-term plan
Professional stock traders may buy and sell stocks in the short term in response to — or in anticipation of — small price movements in hopes of turning a profit off of market inefficiencies. Professional traders base their decisions on an immense amount of data and expertise, and even so, it is difficult for them to beat the market. Consider that 85% of active large-cap fund managers fail to beat the S&P 500.
The average investor is something else entirely. They are not looking for ways to exploit short-term market movements. Rather they are looking to grow their wealth over the course of years or decades. They have built a long-term investment plan based on their financial goals, time horizon, and risk tolerance. Asset allocations — how investments are divided between stocks, bonds, cash, and other investments — are set according to this plan. And the assumption that the market will experience many short-term dips is baked in. Long-term investors hope that, over time, the market will steadily climb, as it has historically.
As a long-term investor, any decision you make should align with your long-term plan to ensure you’re continuing to work toward your goals.
Understand that it’s hard to be right twice
When you time the market, you’ll have two critical decisions to make. You’ll need to know when the market is topping out so you can sell at its peak, and you’ll need to know when the market has hit the bottom so you can buy low and get back in at the right time. The likelihood that you’ll be able to successfully predict either point is extremely low.
Invest on a set schedule
One way to prevent yourself from trying to time the market is to invest a set amount of money on a regular schedule, a strategy known as dollar-cost averaging. For example, you might invest $1,000 once every quarter. By investing the same dollar amount on a regular basis, you will naturally buy more shares when prices are down, and fewer shares when prices are up and the market is expensive. This strategy helps you lower the average cost per share over time.
It also helps take the emotion out of investing. With your investments schedule already in your calendar, you never have to wonder if now is the right time to jump into the market.
Reach out to your financial advisor
Resisting the urge to time the market doesn’t have to mean keeping silent about concerns you have about your portfolio. If volatility or larger economic issues have you wondering whether you ought to be rethinking your investment strategy, get in touch with your financial advisor. They will be able to put current trends in the context of long-term market patterns and your overarching financial goals.
If you decide that there are issues in your strategy that need to be addressed, you can do so with professional help and with the confidence that you are amending your portfolio to better align it with your risk tolerance and goals, rather than reacting emotionally to the latest market fluctuation.
SOURCES:
https://www.investor.gov/introduction-investing/investing-basics/glossary/dollar-cost-averaging
https://www.investor.gov/introduction-investing/investing-basics/glossary/day-trading