Why Timing Isn’t Everything: 3 Reasons to Invest for the Long Term

DEWITT, Mich. - June 22, 2015 - PRLog -- Kate Warne, Ph.D., CFA
Investment Strategist

There’s no such thing as "perfect timing" when it comes to investing. That's because it's impossible to predict exactly when the stock market or interest rates will move. But timing isn't everything. Market performance is a big part of your investment returns, but studies have shown that how you react to market changes is even more important.

Historically, investors who stayed invested over time have been more successful than those who try to time the market. No matter what the market is doing, your actions should be based on why you’re investing in the first place and what you’re trying to achieve. Here are three reasons why it’s a bad idea to try to outsmart the market – and a good idea to invest for the long term.

1. Your actions can be more important than the market’s.
The bottom line is that buying more of what’s performing really well and selling during downturns have reduced investor returns over the past 20 years. This chart from DALBAR, a financial services research firm, compares actual investor returns to a buy-and-hold average. As you can see, investors who stuck to their strategy and stayed invested benefited from higher long-term returns. Actual investor stock returns averaged about 5% per year over the past 20 years, while the buy-and-hold benchmark was nearly double that, averaging about a 10% annual return. And investors in fixed income did even worse.

The strategy you've developed with your financial advisor should be tailored for your specific financial goals and current situation. And it’s designed to help keep you on track through good and bad markets. Staying invested, combined with regular rebalancing, can help you avoid actions that lowered returns.

Rebalancing means realigning your portfolio with your recommended mix of stocks, bonds and other investments, based on your goals, circumstances and comfort level with risk. It usually involves buying some investments that have declined in price and selling some investments that have done really well because they’ve become too big a part of your portfolio. In other words, it’s buying low and selling high, which can be hard to do emotionally.

2. You can’t be nimble enough.
Some people think they need to be nimble and trade more frequently to deal with stock market moves, fast trading and uncertainty. But even nimble investors are likely to misstep. In fact, DALBAR also discovered that investors who tried to time the market frequently sold after prices had dropped, especially during long market declines – and selling “low” reduced their long-term returns.

A buy-and-hold approach may be a simple strategy, but it’s not always easy to execute. That’s because it can be hard to stay invested when it feels like you should sell.

Large daily stock market moves can be unnerving. But instead of waiting for or worrying about the next big drop, check that you have an appropriate amount in fixed income and enough cash to cover your short-term spending needs. Make changes based on your situation, not the market’s. And be ready to consider buying – not selling – quality investments if stock prices fall.

3. You may lose sight of your goals.
Remember why you’re investing in the first place and focus on what it’s going to take to move toward your financial goals. Have you recently reviewed your portfolio with your financial advisor to make sure it still has the right investment mix for you? If not, then you may need to rebalance it by adding investments that haven’t done well.

When investments have performed well, it’s easy to forget they can decline sharply, which makes it tempting to buy “high.” In fact, DALBAR found that investors frequently make the mistake of chasing returns. They bought investments that had recently done well, which also ended up reducing their returns.

Since stocks have been among the best-performing investments in four of the last five years, make sure you have an appropriate amount for your situation – not too much and not too little.

Focus On Your Strategy
Talking with your financial advisor is key to staying invested and on track to help meet your financial goals. Working together, you can make sound decisions whether the market is up or down and feel more comfortable over time.

Remember that your investment decisions should be based on your unique goals, comfort level with risk and financial circumstances. Make sure you understand the risks of investing, including loss of principal.