When it comes to the stock market, good timing will always mean nothing - but providing your time could mean everything.
The most common concern investors experience at the start of their journey is purchasing their first stocks at a bad time. It's true that investing at the wrong time could leave you with a loss, but it's important not to let an early loss impact your determination.
Whenever you choose to invest, there will always be one aspect on your side - time. It's important to look at the big picture: over time, the compounding returns of well-placed investments will begin to prove themselves as a great choice. This is irrelevant to the position of the market when you purchase your first set of shares.
Make your first purchase
Rather than worrying about when to make your first purchase, consider how long you'll leave your money in the chosen market. All investments offer varying degrees of risks and potential for returns, with each investment you consider having a different time frame.
If you're looking for a return in the short term, a bond will usually offer smaller, more reliable returns. According to Ibbotson, between 1926 and 2003 the U.S. Treasury bills yielded roughly 3.7% each year. This may seem like a small figure, but when we consider that inflation didn't start to rise until the 1960s, it soon becomes an attractive return.
Those who invested in bonds over the longer term have experienced slightly higher levels of return; in the same period, they achieved an average of 5.4% annually. During this period, the market experienced volatile periods, such as the 1980s when they returned almost 14% annually, or the 1950s, when bonds actually lost roughly 4% each year.
Stocks are also a great investment choice, with large-cap stocks returning 10.4% on average each year between 1926 and 2003. Although the return is higher than bonds, when we consider the various decades they did follow similar trends. During the 1930s the stock market suffered a slight decline, followed by several well-performing decades, with returns in the 1990s of 17.3%.
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When do you need the money?
You will be able to accept a higher level of risk if you have a longer time to wait for your return, as you will be able to ride out any drops in the market.
But, if you need to take your money out of the market at some point in the next five years, it is advisable to avoid stock-centric mutual funds and individual stocks. If your timeframe is shortened to three years, you should avoid real estate investment trusts and bond mutual funds, which could take a fall if interest rates rise.
This still leaves a few sensible options, such as individual bonds or certificates of deposit which hold a duration of less than three years. It is also possible to invest your money in a money market fund or simply place it in a savings account. These options will generate a small income, but still guarantee the return of your principal investment. It's obvious that the sooner you need to remove your money from the investment, the less you can afford to lose.
If you're looking for a long-term investment which could take you through to retirement, stocks are a very good option with their potential for high returns.
Choosing when to sell
Once you've chosen your investment and decided when to put your money in, you should also decide when to take it out. A bond will sell itself when it matures, so this will only apply if you're considering purchasing a stock or stock mutual fund.
There are investors who believe they can predict the market. They'll advise everyone to sell their stocks when the market is about to take a fall and buy them back when it's on the brink of rising. However, it's worth remembering that investing is not that simple, and their timing methods are often down to luck, rather than expert timing.
A downturn in the economy could impact the growth of a corporate, so at this time it would be advisable to sell any investments which are overvalued. But, an accurate system for perfect investment timings is only a dream.
Investors in mutual funds often make a quick withdraw if their returns start to fall. However, there are several academic papers which have proven that investors who jump quickly to different mutual funds often experience lower returns than those who ride out a fall.
Riding out changes in the market is good advice, except for actively managed funds. If you've engaged the services of a professional money manager, the fund could be transferred to another manager, who may make poor choices. There may only be a few months of unsatisfactory management, which could make it worthwhile sticking with the investment, but if you are not happy with the decisions you may want to sell.
There are two major warning signs, which could predict that it is an ideal time to sell. The first is if the business fundamentals change, so it is no longer an attractive industry. The second warning sign is when stocks become overvalued, with shares at unsustainable levels. Both of these signs could indicate a likely crash in the market.
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Try to ignore the news
You may have noticed that the media often focuses on one particular index, assuming that its performance is indicative of the whole market. There are investors who will perform technical analysis to monitor the changes in the market, in an attempt to predict when the market could rise. The key to successful investment is to monitor the whole market alongside the weaknesses and strengths of individual companies. The best way to benefit from long-term returns is to invest and hold on to your investment.
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Review your investment
Once you make your investments, they will need careful attention. All investments should be reviewed regularly to analyse their position in the market, to ensure they are performing well against alternative options.
If you do make a mistake, review the steps and learn from them. All investors will make a mistake every now and again, so it is worth learning and ensuring they don’t happen again. Try to review your investment portfolio every three months if you are short of time, although weekly analysis will provide you with a deeper insight. It is not necessary to track your investments every hour, but you should have an understanding of trends in the market.
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The article is based on an article from The Motley Fool.