Time or Timing in the markets
How important is it for investors to time the markets?
I know a retired man who cashed in his retirement to buy a car at a time when the markets were up. This was in February 2020 just as covid-19 was beginning to spread across the globe. The following month, the markets began to slide. I said, “no wonder you’re smiling.”
It was good luck rather than good management, but it could be considered good timing even though it was a fluke.
There are other cases of investors who were not so lucky.
One was an investor who switched from growth funds to conservative funds during the market downturn only to find that all gains were lost when the market rallied, losing thousands.
Another is an investor who used part of their retirement funds for a deposit on a house as they can do with kiwisaver, New Zealand’s retirement savings plan. That sounds good, but they withdrew as much as they could at a time when the markets were falling and losses were said to be fifteen thousand dollars. Like the other investor who switched funds, this investor also lost profits when the markets rallied.
The real estate market in New Zealand went crazy during 2020 due to the number of New Zealanders returning home and buying houses. Many people jumped on the bandwagon of buying properties. It’s the FOMO factor at play here. FOMO, for those who don’t know, stands for “Fear of missing out.”
A common theme that emerges from all of this is that the real estate market is out of reach for first-time homebuyers. It is still important for people to develop their asset base and find alternative ways to invest their money because having assets behind you puts you in a better financial position for whatever is to come.
The key to investing is doing it the right way. You wouldn’t invest in growth funds if you were going to use the money for another short-term purpose because the markets could drop just before you withdraw the money. On the other hand, if you have time on your side, investing in riskier funds may be an option if you have the temperament to handle volatility.
An investor must decide if this money will be used in the long, medium or short term and set their goals accordingly. An investor’s risk profile is another factor to consider; It’s easy to be an investor when the markets are rising, but if the rollercoaster ride of growth stocks is going to keep him up at night, then he needs to be a little more conservative.
The investor who switched to more conservation funds when markets headed south and lost profits when they rallied allowed their own emotions to get the best of them. It is important for investors to improve themselves and train themselves to invest with the right mindset.
