4 perils of market timing during political uncertainty

We’ve got unbelievable political uncertainty at the moment so what does this mean for your investments or your retirement savings? This is a topic I have covered on The Retirement Café podcast recently – you can listen here.

You know, it’s certainly understandable if the economic uncertainty unfolding in the daily news has left you worrying or very concerned about what’s coming next, whether it’s the UK, or the US entering into a trade war with China. It’s hard to deny that the prospect is currently causing considerable market turmoil.

Can you hold steady?

So regardless of how the coming weeks and months unfold, are you okay with gritting your teeth and keeping your carefully structured portfolio on track as planned?

This probably doesn’t surprise you, but that’s exactly what we here at MFP Wealth Management would suggest, unless of course new or different personal circumstances warrant revisiting your investments for reasons that have nothing to do with all the tea in China.

That said, news in the world, whether it’s abroad or in the UK, is admittedly unsettling. And if you’ve got your doubts, you may be wondering whether you should now somehow shift your portfolio to higher ground until the coast seems clear. In other words, might these stressful times justify a measure of market timing.

4 reasons not to time the market

So I want to cover off four important reminders on the perils of trying to time the market at any time.

It may offer brief relief, but market timing ultimately runs counter to your best strategies for building durable long-term wealth.

One: Market timing is undependable

So number one, you know, market timing is undependable.

Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel obvious that the next one is nearly here, but is it?

It’s possible but market history has shown us time and time again that seemingly sure bets often end up being the losing ones instead, even as recently as year-end 2018 when markets dropped almost overnight, many investors wondered whether to expect nothing but trouble in 2019.

As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall. Had you gotten out then, you might still be sitting on the side-lines wondering when to get back in.

The same can be said for any market timing trade you might be tempted to make today or any day.

Two: The odds are against you

Number two, so market timing odds are actually against you.

Market timing is not only a stressful strategy, it is more likely to hurt than help your long-term returns.

That’s in part because average returns aren’t the near term norm, volatility is.

Over time and overall markets have eventually gone up in alignment with the real wealth they generate, but they’ve almost always done so in frequent fits and starts with some of the best returns immediately following some of the worst.

If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have done before.

You’re betting against everything we know about expected market returns.

Three: Market timing is expensive

Market timing is expensive, whether or not a market timing gambit plays out in your favour, trading costs real money.

And to add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest.

If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous.

Four: Market timing is guided by instinct over evidence

As I’ve covered before, your brain excels at responding instantly or instinctively to real or perceived threats.

When market risks rise, the same basic survival instincts flood your brain with chemicals that induce you to take immediate fight or flight action. If the markets were a natural forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioural biases cause your emotions to run ahead of your rational resolve.

We’d like to think one of the most important reasons you would hire a financial adviser is to help you avoid just these sorts of market timing perils.

During just these sorts of tempting times, this is when you really need to take advice. Even if you do everything right in theory, we still cannot guarantee your success, but we are confident that sticking with your existing plans represents your best odds in an uncertain world.

The proven benefits of getting advice

So if you have your doubts, go and take advice, go and find your financial adviser and have a conversation.

It’s our job, not to mention our moral and fiduciary imperative, to offer you our best advice across all of the markets moves and while market timing may be illusory, we are here for you and ready to explore various real steps you can take to shore up your investment resolve regardless of what lies ahead.

Get in touch if we can help you.