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Market Timing

Smart Tip

One of the biggest risks of market downturns is the emotional temptation to pull out until things improve. That can lead to big losses.

For example, investors who missed just the five top-performing days in the past 20-year period can see returns that are 30% lower than if they’d stayed invested the entire time.

When you hear the phrase ‘market timing’, you might think of the famous quote by Warren Buffett, the renowned billionaire investor, who said, “The only value of stock forecasters is to make fortune-tellers look good.”

Market timing is essentially the practise of trying to predict what the markets will do, and act accordingly to obtain positive results. It sounds logical in theory, but in reality it’s quite another story.

Markets are complex, complicated and highly sensitive systems. The ripple effect of economic data, company announcements, political events and even social media can put even the most seasoned investors (as Buffett will attest to) at risk of misjudging what the markets will do.

In fact, we’ve seen seven major market downturns since 1973. That’s roughly one every six years. The last one, in 2008, was particularly devastating, reducing the value of many investors’ portfolios by thirty percent or more. Overall, the TSX lost 34% and took 73 months to recover.

At the same time, we know that those who ride out all the downturns see substantial returns over time. An investment of $10,000 that remained untouched in the Toronto Stock Exchange (TSX) from 1975 to 2014 would grow to well over $500,000—or the equivalent of 10.7% per year.

But it can be tough to sit and wait. And the closer you get to retirement, the more you need to be concerned about market downturns.

Market Timing

Consider the fact that $10,000 invested in the Toronto Stock Exchange with reinvested dividends in 1975 would have grown in value to $500,818 by 2016. The dangers of trying to time the markets can outweigh the benefit of just staying invested over the long term.

Most Nova Scotians can’t gamble with their savings, but there are a variety of ways to avoid the sting of market downturns.

Delegate

They say the best leaders know how to delegate. And wise investors know that the best people to choose and monitor your assets are professionals. Seasoned investment managers have the experience, human resources and research data to make informed decisions about investments. Choosing managers who have a solid track record and a strong history in their category is a smart defensive move against market twists and turns.

Diversify

Putting your eggs all in one basket can be devastating to an investor—no matter how the rest of the market is performing. Having a broad, vetted range of investments and investment types (such as stocks and bonds) is a smart way to ward off the impacts of market declines. Successful investment managers (mentioned above) are trained and experienced in this form of reducing risk.

Disconnect

One of the biggest risks of market downturns is making emotional mistakes. Jumping out when the markets are low, for example, can mean devastating losses that you cannot recover. We use the term disconnect in two ways:

  1. Step away from your investments if they are causing you stress, which may lead to irrational decisions. Looking at your portfolio every day during a downturn can be downright miserable;
  2. Keep some cash on hand. It’s always good to have a contingency fund that you can dip into if you need emergency money while markets are down. That way you’re not robbing from your funds when they are struggling to return to normal values.

Market volatility is inevitable at some point on the path to retirement. Following these principles can help you weather the storms. (Learn about other financial risks to avoid.)