The Waiting Game
So you have finally had enough of watching your savings earn pennies in interest and have decided to start investing! But now you have found yourself sitting on the sidelines, waiting for the “perfect” time to jump into the market. Maybe you’re hoping for a dip, a chance to buy low and ride the wave back up. It’s a tempting thought, right? But I’m here to tell you, as a wealth advisor who’s seen it a lot, that waiting game might be costing you a lot more than you think.
The Illusion of Control Fallacy
Us humans have a funny way of thinking we can control things that are ultimately out of our hands. It’s like us trying to predict the weather a year in advance – sometimes we get lucky, but more often than not, Mother Nature does her own thing no matter how well informed we make ourselves. The stock market is not very different in that sense. It’s influenced by countless factors, from economic trends to geopolitical events, presdential trials, social media buzz, and trying to predict its every move is a fool’s errand for 99% of people.
“The illusion of control is the strongest predictor of risk propensity and investment performance.” states Syed Zain ul Abdin. This illusion of control can lead us to believe we can time the market perfectly, swooping in at the lowest point and selling at the peak. But in reality, even seasoned professionals struggle to do this consistently. And while we’re busy trying to outsmart the market, the average investor would be missing out on potential gains. To draw the picture at how precise and investor would have to be to make timing the market worth it, there were exactly 5,036 trading days during the 20-year period from January 1st, 2000 to December 31, 2019, and would you like to know how many of those days were responsible for roughly half of all of the returns for those two decades? Whatever you guessed is probably wrong, because the answer is Ten Trading Days, if you missed 10 out of 5,036 days, you would have cost your self half of your potential investment accumulation. Waiting or timing the market can be a very expensive decision.
Herding Behavior
Ever seen a flock of birds suddenly change direction? That’s herding behavior, and it happens in the financial world too on the drop of a dime. Have you ever heard the financial term “ buy the rumor, sell the news” ? This leads to group behaviors and actions when the market gets volatile; investors tend to follow the crowd, selling off their assets in a panic or holding back from investing altogether. But remember, the market is a long game, fueled by businesses ability to earn profits today and in the future, and these short-term fluctuations are just blips on the radar, caused by short term fickle opinions and speculations. There is a small subsector of highly trained professionals that dedicate their entire life to being able to predict these moves, and a majority of the time, many are unsuccesful at consistently timing the market.
Dollar-Cost Averaging:
So, what’s the alternative to this waiting game and herd mentality? *Dollar-cost averaging (DCA) has entered the chat* Dollar Cost Averaging is your trusty sidekick in the investing world, doing the heavy lifting of saving you from your own bad decisions overtime. DCA is like a marathon runner, steady and consistent, not a sprinter trying to time the starting gun. You invest a set amount of money at regular intervals, no matter what the market is doing. This means you buy more shares when prices are low and fewer when they’re high, averaging out your cost as well as lower investent risk over time. But DCA isn’t just about easing your mind (although that’s a nice perk!). It’s also a tried and true proven strategy for more risk adverse investors which typical for investors who have less experience.
The Cost of Procrastination: Time In vs Timing
Every financial literacy class and course stresses the importance of using time to your advantage so you have more time to grow in the market. This is because “tIme in” the market has historically always outproduced “timing” the market. That’s the power of compound interest, and it’s working against you every day you wait. There is an old Chinese proverb that states “The best time to plant a tree is twenty years ago, but the second-best time is right now.” Don’t let the illusion of control or the fear of missing out hold you back from building your financial future. Remember, investing is a marathon, not a sprint. If you are unsure and are procrastinating, start small, stay consistent, and let time and compound interest work their magic. And yes, if you need a helping hand along the way, don’t hesitate to reach out to a licensed financial advisor. We’re here to guide you through the ups and downs, and help you reach your financial goals. Remember, it’s never too late to start investing in improving your future.
Read the full article here
