One of the most challenging aspects of investing is timing the market. While buying low and selling high is a great idea in theory, in practice it can be exceptionally hard to successfully implement over the long term. That’s partly because no two bull markets or recessions are the same, and different catalysts can contribute to them taking place. As such, accurately predicting the future direction of the market can be tough.
Investing at the wrong time
Despite its difficulty, many investors try and time the market. In a large number of cases, this has limited success. For example, many investors may be thinking that now is the right time to invest in stocks with exposure to the world economy. After all, the outlook for the global economy is relatively strong, and the FTSE 100 continues to trade only 1,000 points higher than it did almost 20 years ago.
However, buying shares during a period of great optimism may not always be a good idea. The stock market can price in a considerable amount of success that is ultimately not delivered. Or even if it is, share prices have already factored it in, and investors are left with minimal investment returns due to a lack of a margin of safety.
Investing at the right time
Of course, buying shares during more challenging periods is usually a good idea in the long run. There are caveats to this, such as ensuring company-specific risk is reduced through diversification, while in the short run, paper losses can be relatively high.
However, history shows that investors who buy during a downturn for a particular country, industry or segment usually end up with higher profits than those who buy during more positive periods. Even so, demand for shares is often lower during difficult eras for the economy, rather than when GDP growth is strong.
As such, investors looking at the prospects for the UK economy at the present time may decide that it is not a good time to invest. The Brexit process has been challenging, and may lead to further uncertainty. Even if a deal is struck between the UK and the EU, the period of transition could lead to uncertainty. And once Brexit takes effect, business and consumer confidence could be at exceptionally low levels.
This, though, could be a perfect time to buy UK-focused stocks. They may be volatile and have disappointing forecasts for the current year. But they may also offer strong growth potential in the long run due to their wide margins of safety.
As such, for investors who are taking a long-term and logical standpoint when it comes to managing their portfolios, there could be significant opportunities on offer. Certainly, investing in global shares may seem to be less risky at the moment due to the prospects for the world economy being more positive than those of the UK. But as history shows, buying stocks with narrow margins of safety can prove be a costly investment mistake.
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