Time in the market is crucial
During
the market volatility of the past few years, many investors saw dramatic falls
in their portfolios. No one can predict
what the market will do in the future, so don’t let short-term volatility drive
your long-term investment planning. Investors can act emotionally and as a result
may sell out at or near the stock market bottom. Successful market timing during a decline is
extremely difficult, because it requires two near-perfect actions: getting out
and then getting back in, both at the right time.
The
opportunity cost can be substantial if you wait until you feel confident in the
market. You could miss the best days by
staying on the side lines. The main
factor working against market timing is that market gains often come in quick
bursts and if you miss enough of them, you could lose all of the long-term
advantages of owning shares.
The
figure illustrates the opportunity cost
facing investors. If you had invested R100 000
over the past 15 years to March 2012 in the South African FTSE/JSE All Share
Index, your investment would have grown to R526 836. However, if
you had decided to get out of the market during volatile periods in these 15
years and as a result missed the market’s best 10 days (that is 10 out of 3 765
trading days) your investment would have only grown to only R289 513.
