Even long-term investors can sometimes use timing strategies to go in and out of the market, but it’s best to have a plan and stick to it.
If you’re a long-term investor, you’ve probably heard the best way to weather a storm in volatility is to keep your head down and wait it out. Trying to time the market can put you at risk of buying or selling at the wrong juncture and missing opportunities.
“Market timing may be a risky proposition," said Keith Denerstein, Director, Guidance Product Management at TD Ameritrade. "Missing just a handful of the market’s best days could cause you to lose out on the majority of potential gains over decades.”
For instance, if someone had invested $10,000 in the S&P 500 at the end of 2002 and simply ridden out all the bull and bear markets since then (even the historic drop of 2008), they would have finished 2017 with more than $40,000 thanks to an annualized total return of 9.92%, according to research by Putnam Investments. If they'd tried to time the market by moving in and out of stocks and managed to miss the best 10 days of that stretch, they'd have ended up with less than $21,000 on an annualized total return of 5.03%. If they'd somehow managed to miss the 30 best days between Dec. 31, 2002 and Dec. 31, 2017, they would actually have lost money! That's just 30 days out of thousands spread over 15 years, and certainly helps explain why market timing can be risky.
That doesn’t necessarily mean you’re stuck in place as Wall Street gyrates, however. But it helps to have a plan and stick to it.
You can buy or sell when times get turbulent, but many investors who do choose to get in and out of the market prefer to establish solid rules about entry and exit times before jumping into (or out of) the market. Doing this can potentially help these investors avoid holding onto losing positions for too long or buying a given stock at lofty levels it might not be able to hold.
“It starts with having a plan before you place the trade,” says JJ Kinahan, Chief Market Strategist at TD Ameritrade. “This applies not only to price, but to time frame. Being true to your time frame can help a lot.”
Here are some rules investors (and traders) should keep in mind when they trade in volatile times, or pretty much any time:
Working with a professional to develop a plan that identifies and helps you pursue your goals is a key first step in the investing process for many, especially those investors who don’t want to be as hands-on or worry so much about portfolio management.
Essential Portfolios and Selective Portfolios offered by TD Ameritrade Investment Management, LLC allow you to establish a target, monitor your progress toward that target, and, if you’re falling behind, give you ideas to get back on track.
For long-term investors, market timing strategies may not be relevant, even when things get volatile. The recent choppiness may have you nervous, but perhaps that old idea of keeping your head down and not watching every headline or stock tick makes sense at this point, especially if you don’t need your money for a long time.
“A common long-term investor attitude may be to look at pullbacks or corrections as potential opportunities, especially if you have a long-term time horizon, by staying the course and being disciplined,” says Robert Siuty, Senior Financial Consultant at TD Ameritrade. “Making systematic, periodic additions to your diversified portfolio over time and taking advantage of things like dollar cost averaging is a common approach helping with building wealth in the long run.”
Denerstein added: "No investor has a crystal ball that will tell them the exact right time to buy or sell. Planning for your goals, staying invested, and evaluating professional portfolio management will give you some basic ideas to consider for your financial future.”
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