When the market climate is uncertain, investors often become nervous and lose sight of their long-term investment goals. They are often tempted to postpone new investment, and even to sell their current holdingswith the aim of reinvesting when the stock market stabilises.
However, if investors are able to take a long term view, it is often best to holdd onto investments through periods of volatility.
The pitfalls of market timing:
Of course all investors would like to be able to predict the movements of the market, buying at the bottom and selling at the top. This is called market timing.
Unfortunately, it is very difficult to time movements in and out of the market, particularly in a period of extreme volatility. And getting it wrong can significantly affect the performance of investments.
Selling at the first signof a downturn can prove particularly bad. Sharp falls in the maket are followed by sharp gains. While it may be tempting for for investors fearing further losses to sell their investments, they risk locking in losses and missing out on gains.
In for the long haul:
The long term performance of equities demonstrates that there is no need to time the markets; its good enough just to be in the markets. Research shows that investments made when the markets had already begun to recover, and those made when it is falling, have still paid dividends.
In contrast waiting for a better time to invest can cost investors dearly. Take a look at any stock market graph and you will notice that investors who remained invested over the last five years would have recieved returns around 60%.
Many of the stock markets best days have come immediately after sharp falls.
Bottom line, trying to time the markets, invariably goes wrong.