You may or may not have heard the saying, “It’s not about timing the market, but time in the market.” But what exactly does this mean?
Some investors may tend to place a short-term focus on how their investments are performing. They’ll frequently track how their investments are going, get excited when it goes up, and then, if it falls, they’ll become carried away with emotion and stressed by the short-term loss.
But what about the long-term picture? Over time stocks tend to go through periods of growth and decline – this is normal. Therefore, selling off stocks after a short period of decline, rather than focusing on the long-term goal can be a strategy that doesn’t add value, given it is likely that shares will likely rise in a longer run.
Just as hard as it is to predict the downturns, it is also hard to predict when stocks will turn around and rally. This is known as timing the market – picking the tops and bottoms.
A more long-term strategy is to utilise the advantages of time in the market – that is, the longer you are in the market, the more likely you are to see a healthier return.
The first step is to have the right portfolio for you. If you are likely to withdraw your money when the market declines, you should probably be in Moderate or Conservative portfolio. This way, a stock market decline should have a less emotional impact on you, and you will be more likely to remain disciplined with your strategy when markets decline.
If your savings goal is short-term (less than three years) a Conservative portfolio is also probably best.
The Aggressive portfolio is for those with long-term saving goals and the ability to remain calm and disciplined during market downturns.
Having the right portfolio is an important step in avoiding the emotional traps that can cause you to make foolish decisions.
The second step is to have a discipline. Invest small amounts regularly, regardless of market situation. Because this will help you to manage market uncertainty. This is a well-known investment strategy, known as Dollar Cost Averaging.
Another benefit of staying long term in the market is from compounding. This is when an investments’ dividend are being reinvested – and generating additional dividend over time. Reinvesting dividends into buying more shares can increase returns due to the power of compounding. So, the longer you spend in the market, the more dividends you are likely to receive, which are reinvested into more and more shares over time.
It is not easy when it is your money. We all experience the emotional highs and lows that come with investing. However, by maintaining a disciplined, automated approach, and having the right portfolio, you can avoid short term stress and take advantage of Dollar Cost Averaging and compound returns over time.
