People often worry about the timing of their investments. For many it better to wait for the “right moment” rather than picking the “wrong point” in the underlying market which may leave you staring at losses right off the bat.
There is a saying that “The best time to plant a tree was 20 years ago. The second best time is now”. The same goes for investing. That is perhaps due to the most powerful financial tool at work – compounding interest.
Compounding occurs when the earnings of an asset are reinvested and then generate their own earnings, creating a snowball effect. The longer the time frames the greater the snowball effect.
Importantly, the longer you have to amass your investment, the greater risk you can accept, since you’ll have more time to wait out periods of bad returns from poor markets.
Research has shown that even badly timed growth market investments were much better than no investments at all. Even the worst possible market timers would have beat not investing in the growth markets at all. Procrastination can be worse than bad timing. Naturally, those that had perfect timing did extremely well but those with less capability did comparatively well.
Investment markets are inherently unpredictable. Rather than fretting about when you should make that investment, think instead about how long you’re planning to keep money in the market. Different investments offer varying degrees of risk and return, and each is best suited for a different investing time frame. While there are no guarantees on past performance, growth orientated investments, like shares and property, have performed the best over the longer periods.
The best course of action for most of us is to create an appropriate plan and take action on that plan as soon as possible. It’s nearly impossible to accurately identify market bottoms (and tops) on a regular basis.
The takeaway is that people who sit out for long periods while waiting for the ideal “buying time” are giving up the most important asset – time.
Do not try to time markets comprising of growth assets. Rather, try and start save hard and let compound interest work for you.
Nick Stratus – 30th March 2016
Solid Financial Advisors