Is Timing Everything?

“Time is Money” is a famous phrase attributed to Benjamin Franklin that many of us have heard before. So why is time so important to an investor and is time really money? The simplest answer is yes. The time value of money is a concept that a sum of money is worth more now than the same sum of money in the future. The underlying premise is that you could invest the money and grow the initial sum due to its earning potential in the interim.

Time also plays a significant role in how investors choose to allocate their funds. A younger investor has the value of time which can allow them to be a much more aggressive investor. They have many years to recover from a poorly timed investment. An investor approaching the retirement years has less time on their hands. They have worked hard to gain their wealth and so they may not be willing to throw caution to the wind.

So how else, you may ask, does time affect an investment strategy? Many investors will try to time the market. Market timing is an investing strategy in which the investor tries to identify the best times to enter the market and when to get out. Generally, investors who employ this strategy are attempting to outperform the market, by buying and selling based on expected fluctuations. Timing the market has both advantages and disadvantages for an investor.

Advantages of effectively timing the market include being able to yield significant returns and benefitting from short term price movements. On the other hand, investors have no crystal ball, and so this strategy is time consuming and takes effort as you must constantly monitor the markets. Not even the best researchers and analysts are able to time the market perfectly and consistently, so this is a risky strategy. Transactions costs may also be high as you frequently buy and sell assets. Investors who also practice market timing must ensure that they are not emotionally investing as this may distort their analysis of the markets. If you exited the mark at the wrong time, you could also potentially miss out on some of the best performing moments of the asset.

The opposite of market timing involves “time in the market” which proposes that knowing when to invest isn’t as important as how long you stay invested and entails a passive management of your assets. These investors see time as an ally and friend and are consistent in their practice of buying assets and holding them throughout the various cycles of the market. This strategy gives the investor the benefit of not missing the highest performance of the cycle. Although this type of investor is buying assets to hold they should not ignore their portfolio. Reviews should be done as your investment needs may change and this will ensure you are on track to achieve your financial goal.

As you strive to reach your financial goals, the best approach is to arm yourself with information. Your investment path is unique, and you should seek the advice of a financial advisor to help you with the final decision-making process.

Christine Rankine is the Manager -Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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