Chasing Market Trends: The Trouble With Timing

Posted

The year 2024 included strong growth for many investments. The stock market was up well over 20% and even Bitcoin, which just a few years ago was considered an investment akin to casinos and lottery tickets, rose above $100,000 for the first time shortly before Christmas.

Numbers like that can be tempting. When you see an asset is worth six figures, it can take every fiber of your being to resist the urge to jump in with both feet and buy as much as you can. On the other hand, if you own an asset whose value has crashed, it can take every fiber of your being to talk yourself out of selling it to avoid losing more money.

None of this should come as a surprise. After all, it's in our nature to buy when prices are high and sell when prices are low. However, any Econ 101 student will tell you that fear of missing out is exactly what you don't want to do if you want to make money.

Your Emotions Could Harm Your Finances

There’s a field of study called behavioral finance that investigates how our emotions and unconscious thought processes impact how we handle money. It turns out they impact it quite a bit, often without us even realizing it. If those emotions cause you to make significant mistakes, they can have devastating impacts on your net worth.

Timing the Market

One common offshoot of emotional investing involves attempting to predict the future. Many investors attempt to maximize their returns by timing the market. They want to buy assets when the price hits rock bottom and sell them only when they reach their peak. The trouble with this strategy is that it requires you to be psychic.

When a cryptocurrency reaches $100,000, is that the peak, or will it go higher? To the market timer, this is a crucial question because selling at $100,000 will be upsetting to them if the cryptocurrency gains even more value; they’ll feel they left money on the table.

But if the cryptocurrency loses value while the investor is waiting to see if it will keep rising, the investor can quickly find themselves worth less than they were when they bought the asset in the first place. That’s not just hyperbole; a study found that people who try to time the market and miss out on just the 10 highest-performing days in 30 years risk cutting the value of their portfolio by more than half!

That’s why most financial advisors, including me, recommend doing everything you can to avoid letting your emotions drive your investment decisions. It’s better to stick to a solid financial plan that is set up to take advantage of the good times and weather the bad ones.

My clients are used to hearing me talk about a concept called red money, green money. Red money involves investments like stocks, mutual funds, and other assets that have the potential to grow your money, but also carry with them the risk of volatility. Green money is “guaranteed.” With assets like CDs, U.S. treasuries and fixed annuities, you may not enjoy as much growth potential as with red money assets, but you can also rest easy knowing you will get a specified payout.

A healthy portfolio includes a carefully selected blend of red and green money investments. Sticking with that portfolio rather than trying to chase returns is a safer way to grow your money as you plan for retirement.

Risk disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

 

Jason LaBarge, financial advisor and president of LaBarge Financial

7 Riggs Avenue, Severna Park, MD 21146 443-647-4321

www.labargefinancial.com

 

Securities offered only by duly registered individuals through Madison Avenue Securities LLC (MAS), member FINRA/SIPC. Investment advisory products and services made available through AE Wealth Management LLC (AEWM), a registered investment advisor. MAS and LaBarge Financial are not affiliated entities.

Comments

No comments on this item Please log in to comment by clicking here