The 10-second version: Despite recent market volatility, I would advise sticking to your standard investment strategy and not trying to time the market. Most of the time trying to buy low and sell high results in losing out on cyclical price appreciation, paying lots of transaction fees, and losing profit to capital gains taxes.
Okay let’s dive in:
“The sky is falling”– relax dad…
“I told you the market was going to crash” – #callmebernanke
“Why didn’t I sell all my investments 3 months ago?!” – Moms know best
This is essentially what I have been hearing from friends and family for the last 3 months.
I get it. People have become used to the ~8 year bull market, and the memory of 2008 is still fresh enough that nobody wants to be a sitting duck for something like that to happen again. I actually have a group text where every time something goes poorly in the market I send a text saying. “Don’t sell, it’ll get better.”
Timing the market is an almost impossible task. It’s possible to get lucky every now and then, but the way stocks are priced ensures the market has baked in its expectations of the future earnings of the company (this includes the possibility that there will be a recession) and is saying this is what the value should be.
Deciding that you know when the right time to buy or sell is means you have a view of the market that is not the consensus driven by everyone else…seems like a bold claim. Even the best hedge fund managers are only correct in their differentiated view of the market something like 53% of the time, and given the speed at which hedge funds are being pushed to liquidation it seems like people aren’t even confident in that.
Chances are you will end up losing money by selling before the peak (the highest point) and buying before the trough (lowest point), paying transaction costs whenever you buy and sell, and paying capital gains taxes on all of your earnings (much of which will be short term capital gains taxes because you are not holding
positions for long).
To put these last 3 months in context, here is how you would have done if you had invested your money at the beginning of 2007 and held it till now.
You would have had consistent compounding returns of ~6.5% (~4.3% annualized capital appreciation + ~2% average dividend yields). That is despite both the 2008 crash and the 19% drop in the last 3 months. I don’t know about you, but I’d be pretty happy with that.
It took 5 and a half years – from October 2007 (the peak before the 08 crash) to April 2013 for the market to regain all of the value it lost in the ‘08 crash.
For a variety of reasons it’s not looking like the next recession will be close to as big of a crash as the last (I would highly recommend reading Ray Dalio’s book Big Debt Crises to understand the differences in debt crises) so there is even more of a reason to not worry about holding onto your positions.
All of this is to say, while 2018 has been a rough year for markets, don’t try and time buying and selling and just keep investing on a consistent basis. I will walk through both how I invest and what I invest in at a later time.
Readwritemoney
(Full disclosure – I make money if you buy the book that is linked above through Amazon affiliates so do me a solid and look into it :))
