Today, the media and internet offer an almost overwhelming number of opinions and strategies about how and when to expose your capital to the market.
Investors can choose to work with a financial advisor to develop investment portfolios, put their trust into computer algorithms and use a robo-advisor, or operate one of many trading platforms available to the individual to build their own portfolio.
Regardless of the choice that best fits the individual investors, there are some common dangers of which they need to be aware. Over the next few months, these articles will explore some of the more common pitfalls to try to avoid.
Timing the market: This is arguably one of the biggest mistakes an investor can make. So why does it happen? Simple. No one wants to have money in the market and watch its value drop 10 percent in a week or 20 percent in a quarter.
And on the flip side, no one wants to be holding on to cash when the market rises sharply and feel they missed an opportunity. However, one of the biggest problems with trying to time the market is that you need to be right twice; buy at the right time and sell at the right time.
Heading into 2019, some experts are giving valid reasons why investors might experience a drop in the market. Trade tensions, possible rising interest rates and unrest in the middle east and Asia, to name a few.
The problem is an investor could look back at 2017, 2014 or 2012 and find experts giving plausible reasons why the market was going to pull back – but it did not. The market is still not predictable, and that makes timing the market an incredibly hard endeavor.
Also, market timing by its very nature will motivate investors to be active traders. An investor taking on this challenge must be aware of the fees of active trading as well as possible tax consequences. The taxes associated with short-term gains will take a much bigger bite out of returns then long-term gains. The possible tax bill and investment fees must be considered before trying to time the market.
As legendary manager Peter Lynch said during a 1990s interview for Frontline on PBS, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves.”
Luke Gawronski, a financial planner with Barnum Financial Group, is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. firstname.lastname@example.org