Tag Archives: Return

Is Investment Timing Important?

18 Oct Investment Timing

When it comes to investing, you’ll hear different opinions about whether timing the market is possible to do over the long term. The people on either side of the argument all have their facts as to why they are right. I’m not going to debate this in this article. What I do want to do is look at it from another angle – how important is investment timing?

Investment Timing

photo credit: h.koppdelaney via photopin cc

If you’re in your 20’s or 30’s and have a small balance in your superannuation fund, whether the markets go up or down next year doesn’t really matter. Even if you get the timing right and are all in (or all out) of an asset class, the actual return you could make (in dollar terms) is quite low. so if you’ve got $20,000 invested and can get an extra 10%, you stand to make $2,000. Now, that will add up over the long term thanks to compound interest, but that’s not the only thing to consider.

On the other hand, if you’ve got $1,000,000 and can make (or not lose) 10%, that equates to $100,000 – a much bigger amount.

So when it comes to market timing, the only reason we’re concerned is because we want to maximize our returns and minimise our losses.

I suggest that this becomes more important to those people who are ten years either side of retirement. They’re at a stage of life where they’re more interested in looking after their capital – they don’t want to take unnecessary risks with it – hopefully they’re saving enough to be on track for a comfortable retirement without needing to take big risks.

So for these people, taking risks is not something they need to do. And history shows us that people are more concerned about losing money than they are with making it. So for these people, a conservative approach could work well. I’m not advocating putting everything in cash, but am suggesting they don’t try and time the market to try and chase the best return – they’ve got the most to lose!

Slow and steady is the best approach here.

A 10% drop on a million dollar portfolio is much more significant than on a $30,000 portfolio.

As they get closer to their expected retirement date, the thing they’re most concerned about is the predictability of their final retirement nest egg. They don’t want the potential value to fluctuate by 10 or 20% in the year they want to retire.

Or in the year after they retire.

So for these people, certainty is very important.

So perhaps something to consider for people close to retirement is how much fluctuation they’re prepared to accept in their capital.

The risk / return theory suggests that in order to achieve a higher return, you need to accept a higher level of risk. One aspect of risk is fluctuation in your capital.

So if you need to achieve a higher return in order to achieve your investment goals, you must accept that your capital will fluctuate in value more.

Is this acceptable to you?

The ideal position to be in is one where you have enough money saved when you’re five years away from retirement that you can accept a lower investment return – and lower risk – and still achieve your desired lump sum of money when you retire.