The dream of buying low and selling high has long captivated the minds of investors. The allure of timing the market, of being the savvy investor who knows just when to strike, can be incredibly enticing.
But the reality is, most of us will never buy at the absolute bottom, and attempting to time the market in this way can often lead to more folly than fortune.
If this realization feels like a disappointment, fear not, for the truth is that it really doesn’t matter in the end.
What truly matters is not the impossible task of perfect timing but rather a sound and consistent investment strategy tailored to your needs and goals.
It’s time to discover why you’ll never buy at the bottom and why you can succeed with your investments despite that.
Why the average investor does so poorly
The statistics surrounding the average investor’s returns can be startling and even disheartening. According to old but still reliable statistics from the 2014 Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the results are far from impressive:
- 10-year time frame: The average investor in a blend of equities and fixed-income mutual funds achieved a mere 2.6% net annualized return.
- 20-year time frame: The annualized return drops slightly to 2.5%.
- 30-year time frame: Even more concerning, the 30-year annualized rate dwindles to just 1.9%.
These numbers are particularly jarring when we consider that the average investor underperforms almost every other investment asset, such as stocks and bonds. So, what’s going wrong? Here are some common reasons why the average investor often falls short:
- Trying to time the market: As we discussed in the introduction, attempting to buy at the bottom and sell at the top is fraught with difficulties. Market timing often leads to missed opportunities and can result in buying or selling at inopportune moments.
- Chasing hot sectors and stocks: Jumping on the latest trend or hot stock may seem like a way to quick gains, but it often leads to buying high and selling low. Trends can reverse quickly, and yesterday’s star performer can be today’s underperformer.
- Panic-selling: Emotional reactions to market downturns can lead to selling assets at a loss, only to miss out on the eventual rebound. Panic decisions rarely align with long-term investment strategies.
- Excessive trading: Frequent trading racks up costs and can erode gains. What’s more, a hyperactive approach to trading often reflects a lack of a coherent, long-term strategy.
Embracing a more disciplined approach
Obsessing about market movements, trying to pinpoint the exact bottom, or jumping from one trend to another can create a chaotic and unproductive investment experience.
It’s tempting to believe these actions will lead to extraordinary gains, but, as we’ve explored, they often lead to underperformance and frustration. What truly matters in the long run is not the attempt to time the market but rather the consistent adherence to sound investment principles:
- Staying the course: Resist the urge to make impulsive decisions based on short-term market fluctuations. A long-term perspective can help you weather the ups and downs of the market.
- Keeping fees low: High fees can eat away at returns over time. Opting for investment options with low expense ratios can make a substantial difference in your long-term success.
- Reinvesting dividends: The power of compounding can be your greatest ally. By reinvesting dividends, you enable your investments to grow exponentially over time.
For these reasons, I personally favour the Vanguard Growth ETF (TSX: VGRO). VGRO offers a well-diversified portfolio across an 80/20 stock and bond split, encompassing thousands of stocks from around the world, including all sectors and sizes, as well as government and corporate bonds.
VGRO low 0.24% expense ratio keeps costs in check, and the ETF periodically re-balances to ensure a disciplined investment approach. In my opinion, it is the perfect long-term, hands-off investment.
