Timing the market seems attractive enough — it doesn’t require a great deal of critical thought to appreciate the risks of entering a market on its downward trajectory.
The only problem is that this is pretty hard to pull off— firstly, and partly because markets are to some degree irrational, your capacity to do so (certainly as a non-professional investor) is limited. In fact, overactive traders tend to mistime the market to frequently that the average investor in the UK underperformed basically every routine financial instrument (think: cash, bonds, etc.) between 1994 and 2014.
Secondly, and arguably more importantly, remember that market dips tend to be transitory. Yes, there are exceptions — and this is where the importance of diversification comes in — but it is surely unrealistic to expect long-term, structural, decline in the established markets.
Examine the historical performance of property, equities, financial instruments; and, the story is consistent. Yes, there may be some turbulence, but the overall path trends upwards. And, the best way to exploit that trend is to adopt a long-term approach.
As JP Morgan’s report demonstrates, if an investor stayed fully invested in the S & P 500 between 1995 and 2014, they would have expected a 9.85% annualised return. However, if they had missed just the ten best trading days in that 19 year period, the annualised returns drop to 6.1%.
Here’s the kicker — six of those ten best days occurred within two weeks of the ten worst days.
Holding your nerve, and adopting a long term mindset, means that you will benefit from all of the best days.