There is a great misconception that reigns over the stock market - one that you too may have fallen victim to - namely, that you should wait, wait, and wait some more, for the best time to invest your money.
It’s called market timing, and it is a practice that could lead you on a search as fruitless as that of the Holy Grail.
What is market timing
Market timing is nothing but the investor's search for the perfect time to enter the markets. The "perfect moment", of course, being the exact second that will ensure you the maximum return on your investments.
Logically, of course, this moment would be when the market is falling. This way you can investing in something that is essentially at ‘sale price’, and then reap the returns when the market recovers and begins to rise again. However, without the help of a crystal ball it is impossible to determine when the market will be at its lowest.
Not only that, but trying to time the market in order to buy when it’s at its lowest, doesn’t take into account the purchase ‘gap’, between the moment you say ‘Yes I want it!’ and the moment your money actually changes hands. Sometimes this delay can be as much as a few days.
The market is something you can neither time nor control, and it is unwise to hold back on your investment purely because you are trying to do just that. Indeed this ‘waiting game’ can be explained perfectly by Behavioural Finance, and our ‘illusion of control’.
When is the time ripe to pick my fruit?
The real determining factor, more than choosing when to invest, is in fact something called compound interest. What is that? It is the act of earning interest on your interest. If, for example, you invest £1,000, with an interest rate of 3%, after one year you will have £1030. At this point you’ll do best not to disinvest them, but rather leave them to bear more fruit.
Thanks to compound interest, your next return will no longer be calculated only on your initial capital (£1,000), but on your capital + the interest already obtained (£1,030). At the end of the second year, then, your money will have returned yet another 3%, giving you a new total of £1,060.90.
In short, time is your ally. Instead of focusing on the moment, you should be looking long term. It takes time to build wealth. The more time passes, the more compound interest will work in your favour and calculate your return on the interest you have accumulated over the years. This article looks at that concept in more detail, and compares the value of saving £3 a day for 30 years, to investing it.
Blink and you’ll miss it
Perhaps it will surprise you to know that even just a handful of days can make a big difference to your investments, yet it is the case.
In the search for perfect market timing, in fact, you could miss some very important moments. As you can see here, a study carried out across a 15 year time period between 1990 and 2005, found that an investor who had lost only ten market days in search of the perfect time to invest, would have earned only 8.1% on his investments, compared to the possible 11.5% he could have earned if he had had his capital invested in those ten days too.
So, are you still waiting for the perfect market before you invest?
Your capital is at risk, and past performance may not be a reliable indicator of future results. Oval Money is not permitted to provide financial advice, and if you have any questions please consult an expert.