Don’t wait for the perfect moment
Although Financial markets have experienced a significant rise over the past year, global financial markets have been volatile this past month due to geopolitical issues and changing trade policies.
Questions about whether it is still a good time to invest are common in times like these, but focusing solely on market timing can lead to fresh missed opportunities. Successful investing involves much more than predicting market movements; it requires discipline, long-term planning, and time-tested strategies to mitigate risk.
The risks of trying to time the market
Market timing refers to the practice of attempting to predict future market movements and making investment decisions, both investing and withdrawing, based on those predictions. While the idea of buying low and selling high is appealing, the reality is that even experienced investors find it extremely difficult to time the market consistently.
The challenge is that the best of a market’s performance in anygiven year is often concentrated in a small number of key ‘best’ days. Those best days are often clustered around periods of volatility, making them nearly impossible to predict. Missing out on those critical days regularly can have a serious long-term impact on your investment outcomes.
Why being (and staying) invested matters
The primary reason to be and stay invested is the power of compounding. Compounding occurs when your investment returns generate their own returns, creating a snowball effect over time. By staying invested, you allow compounding returns to work in your favour, which is critical for long-term wealth creation.
Financial markets have historically trended upward over time, despite both short and medium-term bouts volatility and negative performance. Investors who remain committed to being invested and maintaining their strategy consistently across their timeframe are more likely to benefit. Trying to time your entry and exit points unnecessarily increases the risk you’re taking.
The role of dollar cost averaging
One simple, yet effective strategy an investor can use to mitigate the risk of unfortunate market timing is dollar cost averaging (DCA). This involves investing a fixed amount of money at regular intervals, regardless of market conditions. By doing so, you spread your investment over time and reduce the impact of market volatility.
For example, if you invest a set amount each month, you will automatically buy more shares when prices are low and fewer shares when prices are high. This approach can help smooth out the effects of market fluctuations and reduce the emotional decision-making that often leads to poor investment choices. Does this sound familiar?
Benefits of dollar cost averaging
- Reduces the impact of volatility: You are less likely to invest a large sum right before a market downturn
- Promotes disciplined investing: You invest consistently over time, rather than reacting to market movements
- Takes emotion out of investing: By following a regular schedule, you are less likely to make impulsive decisions based on fear or greed.
The only real downside of DCA is that it does not maximise returns in a consistently rising market. However, as noted, volatility is a normal part of long-term investing, and DCA remains a valuable strategy for navigating these fluctuations.
Focus on long term goals
Investing should be viewed as a long-term journey rather than a series of short-term bets. While it is natural to feel regret after missing out on a market rally such as in 2024, it is essential to remember that markets move in cycles. There will always be periods of growth and periods of decline.
Instead of focusing on market timing, investors should concentrate on investing in a diversified portfolio that aligns with their risk tolerance and financial goals. A well-diversified portfolio can help reduce risk and provide more stable returns over time.
Final thoughts
While it can be tempting to wait for the “perfect” time to invest, the truth is that the best time to start investing is often as soon as possible. The longer you are in the market, the more you can benefit from compounding returns. Strategies like dollar cost averaging can be useful to help mitigate the risk of market timing and promote consistent investing habits.
Remember, it’s time in the market — not timing the market — that leads to long-term success. Focus on your financial goals, stay disciplined, and let your investments work for you over time. Remember, this is an area where a Financial Adviser can provide substantial value.
CONTACT ALLAN HALL FINANCIAL PLANNING
General Advice Warning
The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs and, where appropriate, seek professional advice from a financial advisor. This site is designed for Australian residents only. Nothing on this website is an offer or a solicitation of an offer to acquire any products or services, by any person or entity outside of Australia. Robin Bell, Martin Cimino, Angelo Adam and Allan Hall Financial Planning Pty Ltd are Authorised Representatives of Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323.
