Market volatility: why time in the market beats timing the market

(Feedsy Exclusive)

Share market volatility is a natural and inevitable aspect of investing. 

While market fluctuations can cause anxiety among investors, attempting to predict short-term market movements, known as “timing the market,” often leads to missed opportunities and poor financial outcomes. Instead, adopting a disciplined strategy of “time in the market” tends to provide superior long-term results. 

This approach emphasises maintaining investments over extended periods, allowing investors to benefit from compounded growth, dividend reinvestments, and long-term market trends.

Historically, markets have shown a consistent upward trajectory over the long term, despite periods of volatility. Attempting to jump in and out of investments to avoid short-term declines can result in selling at market lows and buying back at higher prices, eroding overall returns. Studies repeatedly show that investors who remain consistently invested, even through downturns, generally achieve better outcomes compared to those attempting to anticipate market shifts.

One key reason time in the market is advantageous is the power of compounding returns. Even modest annual returns can grow substantially over time when dividends and earnings are reinvested, allowing growth on growth. Additionally, staying invested ensures participation in the best performing days of the market, which often occur unpredictably and closely follow market downturns. Missing even a few of these best days significantly diminishes long-term investment returns.

Furthermore, emotional decision-making driven by fear or panic during volatility often undermines long-term investment plans. Investors frequently sell during downturns to avoid further losses, only to buy back in after markets have already recovered, locking in losses and missing gains.

Here are ten practical tips to help investors manage and cope with market volatility:

1. Stay calm and rational: Avoid making impulsive decisions driven by panic or fear.
2. Maintain a long-term perspective: Remember your overall investment goals rather than short-term fluctuations.
3. Diversify your portfolio: Spreading investments across different asset classes helps mitigate risk.
4. Regularly review your investment strategy: Ensure your portfolio aligns with your long-term objectives and risk tolerance.
5. Invest regularly: Regular contributions, such as dollar-cost averaging, smooth out entry prices over time.
6. Avoid frequent market checking: Constantly watching market movements can heighten stress and lead to reactionary decisions.
7. Keep cash reserves: Maintaining sufficient liquidity reduces pressure to sell investments during downturns.
8. Focus on fundamentals: Invest in companies with strong business models, stable earnings, and solid growth potential.
9. Understand risk tolerance: Clearly knowing how much volatility you can handle prevents overexposure to riskier assets.
10. Seek professional advice: Regular consultations with a qualified financial adviser can provide guidance tailored to your personal circumstances, helping you navigate volatility effectively.

Successful investing involves patience, discipline, and a commitment to a well-thought-out investment plan. By embracing market volatility as a normal aspect of investing and focusing on the market’s long-term potential, investors can improve their financial outcomes and achieve their investment objectives.

If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.

This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.