Experts have been preparing us for a deep recession. The Bank of England expects the economic turmoil to last up to two years. Can ‘timing the market’ help me aim for a million?
Stock markets have already begun declining this year. As they fall, I often find myself thinking that if I could just buy in at the right time then, when markets inevitably recover, I could supercharge my returns.
You will notice that previous periods of turmoil such as the “Global Financial Crisis” do not get categorised until things stabilise for a sustained period, and we can confidently reflect on it. We can be presently aware that markets are likely to deteriorate further. But we will never know the extent of the damage until it’s history.
Ultimately, investing with a shorter time horizon in an attempt to “buy the dip” comes with great risk. It’s certainly something I wouldn’t get right every time!
I do think it’s important to take advantage of dips in the stock market. However, I am better off buying in periodically and with a longer time horizon for my investment.
To give myself the best chance of reaching a million, I must remain rational. Here are four tips I like to keep in mind in order to keep temptation and panic at bay.
Tip 1: remain diversified
During a recession, one company’s stock could get hit particularly hard and present itself as an unmissable opportunity. However, latching on to a particular stock or sector will most likely increase volatility in a portfolio.
A portfolio that is spread out across a broad range of stocks and shares among other asset classes will likely see some investments outperform others. This is known as diversification.
Tip 2: persistency
Even when markets fall, contributing into an investment provision at regular intervals can lead to the accumulation of a greater number of shares. This can help lower the average share prices paid in a portfolio over time without the need to time the market in one go.
Tip 3: be prudent
Timing the market might not be the best idea, but you can still do your own research. For example, avoiding the shares of companies I feel are particularly vulnerable to the current climate might help reduce my downside risk.
With interest rates rising, I have been avoiding companies with excessively high levels of debt.
Tip 4: be comfortable with chaos
Investing in capital markets always comes with ups and downs. However, I take comfort in the fact that the FTSE 100 index began at 1,000 points in 1984 and closed 2013 at 6,749 points. This gives an average annual growth of 6.57%.
So, despite what has happened in past decades, stocks markets have always been able to recover and make up for lost time.
No stock market crash has ever ended before a recession has technically begun. Nor has one ever ended with interest rates consistently rising. High inflation not seen for 40 years is pushing monetary policy into trend-breaking territory. But don’t be fooled into thinking this market cycle is different to any other.
