The latest market rebound proves why you can’t time the market. Now what do you do?
The Markets are Back Up. Now What?
Investors talk about aiming to “buy low, sell high”, but executing that strategy can prove to challenge even the most seasoned investors. Why? Because nobody knows how to predict, read, and react to the countless and random reasons the market goes up or down.
To determine when the markets are high or low, investors look for pieces of information in the news and their financial models. However, the increasing amount of noise from the media coming at us these days makes the determinations to buy or sell even more imperfect. Media have become adept at churning out short-sighted news flow that synchronise perfectly with the latest beat of the market, but they’re consistently leaving out the bigger economic picture. Gloomy views from respectable names can dominate headlines when markets are down or geopolitical turmoil strikes (again). Then, upbeat stories from other respectable sources quickly surface when the markets are up. The end result? Investors get a lot of FOMO (fear of missing out) when markets rise, and they act irrationally when markets drop: they buy more when they see green (buying high) and sell, or stop buying, when they see red (selling low.)
It seems as though no matter how volatile and unpredictable the markets are, investors need to be reminded continually that timing the markets and looking to predict a monstrous change in the economic environment are futile exercises that can cost investors a great deal of money. Unlike humans, the market does not have a predetermined “biological” clock. Concepts such as timing the markets or the economic cycle often are susceptible to subjective biases.
By now, we know that volatility can rise for a variety of reasons entirely unrelated to the health of economy. For one, Trump’s election victory over Clinton reflects the rise of populist politics. Populism is in turn empowered by highly efficient traditional and social media platforms. We now live in a world where a single tweet from Trump can disrupt the G20 summit! The amount of political noise that the market has to endure these days is exponentially higher. We can no longer blame the Fed’s attempt to withdraw from quantitative easing as to why markets are volatile; there’s too much going on to point a single finger in one direction.
Given that the media has the powerful ability to instill hope or fear with a single headline, step back and breathe before making any investment decisions actions based on something you read in your newsfeed.
When it didn’t seem as though it could happen, the world of investing has become even noisier than it was last year. Look at the last few months: suddenly, the doom and gloom that plagued markets in the final quarter of 2018 disappeared, and stock markets around the world made big U-turns and remarkably outperformed last month. No one thought 2018’s troubles would end, and for now, things are looking good. But the truth is, when it comes to the markets, no one knows what’s going to happen, you could end up buying high and selling low when trying to time the market, which will only be disastrous in the long term.
Big Reversal in Asset Class Performance 2019 (YtD)