Should you be trying to ‘time the market’?

Important: This article is for general guidance purposes only and should not be considered investment advice. If you are unsure about the suitability of an investment, please seek out advice. When you invest, your capital is at risk.

When it comes to investment strategies, there are lots of different routes to take to determine when it’s the best time to put your money to work. One of the key decisions, for example, is whether you want to ‘time the market’ with a short-term strategy or look at a more long-term, passive investment strategy.

Both have their pros and cons, but your attitude to risk, the amount of time you have to dedicate to your portfolio and your ability to keep on top of the latest market news all play a part.

What is timing the market?

In its simplest terms, ‘timing the market’ means making an investment when prices are low, but expected to rise, then selling just before down periods to avoid losses and realise gains.

If you’re looking to trade in this way, you’ll make decisions based on whether you think we’re about to enter a ‘bull’ market (when share prices look likely to rise) or a ‘bear’ market (when they look likely to fall).

Buying and selling in this way is often thought to be a riskier strategy than simply taking a long-term view and waiting the market out. Play your cards wrong and you could wind up with painful losses.

Who does this approach work for?

If you’re comfortable with risk and have a tested method that has outperformed simply buying and holding on to stocks, then timing the market might just work for you.

But, it’s not just the ability to hold your nerve that’s essential. You need to have a plan, do your homework and have both the time and discipline to implement your strategy. Even then, there are no guarantees that you’ll be successful.

Meet the day trader

An extreme version of timing the market is day trading. This is where you make multiple trades daily, attempting to capture small price moves, often with large position sizes.

If you’re day trading, you seek out lots of movements – either up or down – so you can hop in and capture a return quickly. The bigger the price moves, the bigger slice you can grab. Importantly, day traders have a short-term horizon, whereas more passive investors are in it for the long term.

The alternative: Playing the long game or ‘sitting it out’

Long-term passive investing is almost the complete opposite of day trading. It involves buying stock index funds, or a selection of stocks, and holding onto them. Regular contributions may occur, but the investment is not sold until the funds are needed or a financial goal is met. This approach can be automated, and requires very little research and no market timing.

It can be pretty lucrative, too. According to data by finance investment website Don’t Quit Your Day Job (or DQYDJ), buying stocks in the S&P 500 and then holding them produced an average annual return of 10.3% between 1957 and 2020. Of course, past performance is no guarantee of future returns.

Whatever strategy you choose, it’s best to consider your appetite for risk and the time available for you to do your own research before investing.

Capital at risk.