With concerns about a second wave of the coronavirus growing by the day, talk of another market crash around the corner is inevitable. At least some of those who believe it’ll happen will also be aiming to sell out just in time and buy back when share prices bottom out.
Here’s why I can’t recommend this strategy.
Market crash timing
Timing the market is fiendishly difficult. Who knew back in March that stocks would experience one of the sharpest falls in history, or that the FTSE 100 would tumble to as low as 5,000?
The simple answer is no one. Not even the highly-qualified fund managers with their armies of analysts and wealth of data. There were simply too many factors at play. And if the professionals can’t do it, what chance do any of us have of predicting the next one?
There might not even be another market crash for years!
Just as we couldn’t predict markets would fall so dramatically in March, nor could we foresee the recovery would be so immediate or so strong. In the US, the S&P 500 index is already back to where it was in February.
The fact that many new investors have made big money on this rebound makes picking the bottom look misleadingly easy. The survivorship bias also means we’re less likely to hear about those who sold out in March and vowed never to return.
Show me someone who has consistently and precisely timed the market throughout their career and I’ll let them manage my money. The shorter the time frame, the larger the role luck can play in stock market success.
I think there’s a better way.
A better route to riches
First and foremost, find great companies worth investing in. What makes a company ‘great’ is contentious. However, looking for the same things as some of the UK’s top fund managers is a good place to start.
Solid companies have a higher likelihood of making you money in the future, even if you need to pay a little bit more than you’d like. Buying an already-struggling business, even at a low price, makes things doubly-tough. The company must first survive a market crash and then turn itself around.
Secondly, hold as much stock as you can within a Stocks and Shares ISA or, for those with one eye on retirement, a Self-Invested Personal Pension (SIPP). Do this, and any profits you make will be free of capital gains tax.
Third, buy regularly. Since you can’t expect to win at the game if you don’t play, holding back with the aim of timing the market perfectly is a fool’s errand. Over the long term, it’s compounding that will make you a millionaire, not the brilliance of your timing.
So, accept what you can’t know and control what you can, namely fees and your risk exposure. For the former, take advantage of monthly investment plans offered by your broker. This can reduce commission costs by roughly 90%!
Lastly, check your portfolio irregularly. A watched pot never boils and your holdings won’t magically grow in value simply by looking at them. In fact, this hour-by-hour, day-by-day approach makes it far more likely you’ll think you can time the next market crash.
Spoiler: you very probably can’t.