When the stock market is volatile, it can be very tempting to move out. For example, if you think that the market is likely to fall even more, you might consider selling investments so that you can buy them back when they are cheaper. This may sound like a good strategy in theory, but in practice it is extremely difficult. Even expert fund managers who spend all their time watching the market cannot tell for certain when prices have reached either their top point, when it might be good to sell, or their lowest point, when it would be good to buy. The problem is compounded by the fact that markets tend to rise very soon after they fall, and the rises are often concentrated into short periods of time. For example, on 13th October 2008, in the midst of the recent market upheavals, the BSE Sensex leapt by 781 points – one of the biggest one-day rises it had recorded to that point. If you try to time the markets, it is all too easy to miss days like that. Of course, you should always remember that the value of investments can go down as well as up, so you may not get back as much as you invest.
Think about time, not timing
Because it is difficult, if not impossible, to predict how the stock market will move from day to day, Fidelity believes it is time, not timing, that is the key to investment success. By this we mean that the longer you stay invested, the more opportunity you will have to benefit from the stock market’s potential for impressive long term growth. If you put off making an investment because you think prices have further to fall, there is a risk that you will miss out on the significant rises that often occur in the early days of an upward trend. Conversely, if you sell an investment because the markets are falling and the news is full of gloomy predictions about the economy, you may find you have come out of the market at exactly the wrong time, just before the start of a recovery. It is worth remembering that markets tend to move in advance of the economy. In other words, share prices can start recovering before the economy shows signs of emerging from the doldrums. The best course is to choose investments that you feel confident about and take a long term view, accepting that there will almost certainly be difficult times along the way.