Wednesday, June 12, 2024

When Should You Invest? A solution to timing the market


Buy low and sell high. It’s that simple. Master that technique, and you’ll always make money. The problem, of course, is that in order to buy low and sell high, you either have to be able to see the future or resist the urge to follow the crowd. Warren Buffett has famously said that it's wise for investors “to be fearful when others are greedy and to be greedy only when others are fearful.” In other words, when everything is going well and the market is going up, you should be worried. On the other hand, when your investments are plummeting in value, that is the time you should consider investing more. This strategy sounds simple enough in theory, but it is very difficult to carry out.

If your coworkers are losing their jobs and your own investments take a dip, it takes a lot of courage to increase the amount you are investing in the market. Usually, when your account statement shows a negative return, the first thought that pops into your head isn’t, “I should put more money into that investment.” It’s exactly the opposite. When you see that your investments have fallen in value, the natural reaction is, “I must have picked the wrong investment. I should stop investing in that and move my money somewhere else.” 

Conversely, when stock prices are going up, and everyone you know is making money, it takes self-control to hold off on investing and wait for better opportunities. Many people start thinking about investing after they’ve heard how well an investment has done. But, if you get in the habit of investing in stocks that have done really well in the past, you are buying high. If you panic and decide to jump ship when the market corrects and it seems like the sky is falling, you just sold low.

As you can see, most folks don't have the self-discipline and insight needed to buy low and sell high. The truth is, we're wired to do the opposite. So, what is the solution? If your goal is to save for retirement over the long term, don’t buy low and sell high, buy all the time. Instead of worrying about market trends or picking the perfect stock, focus your energy on building and sticking to a financial plan. Better yet, set up automatic contributions to your investment accounts. This will remove the emotion from your investing habits and free you from the pressure of accurately timing the market.

Diversifying your investments is one of the keys to making this consistent investing strategy successful. A well-diversified portfolio will consist of investments spread across different asset classes, industries, and geographic regions to help reduce overall risk and maximize returns over time. The goal of diversification is to minimize the impact of any single investment's performance on the overall portfolio.

Your specific asset allocation strategy should be tailored to your own personal situation and risk tolerance. For example, investors nearing retirement should be actively monitoring their strategy to make sure they aren’t taking on too much risk for their situation. Usually, retirees shift to holding a higher percentage of bonds and fixed-income investments for decreased volatility. But, in some situations, it would make sense to consider annuities, market-linked CDs, or other ways to get guarantees against potential market loss. On the other hand, younger investors should be taking more risk and have a heavier weighting of stocks to maximize long-term performance.

Another type of diversification that is often forgotten is the location of your assets. What type of account are you investing in? Is it a 401(k), a traditional IRA, a Roth IRA, or a general brokerage account? Choosing the right investment account or mix of investment accounts is very important and should be determined based on your current tax bracket and/or the tax bracket you expect to move into when you retire.

If you commit to continuous investing through the good times and the bad, there will be times when you buy high, but you won’t compound the problem by selling low. This simplifies the overall investment approach and puts the focus back on where it should be: your financial plan. Every financial plan should be uniquely tailored to an individual’s personal situation, risk tolerance, and time frame. Working with a tax-smart financial professional to build a financial plan can provide a great sense of security and confidence in the inherently uncertain financial world.

Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.


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