The importance of time and timing to successful investing can’t be over stressed. To illustrate this point, consider the most recent bull market that began in October 2002 and peaked almost exactly five years later, in October 2007.
If we look at this time period from the perspective of a new investor who is entering the market with a lump-sum investment of $100,000, the results of a buy-and-hold strategy are outstanding. In just five years this investor has doubled his original investment, and has incurred no tax liability. He now has $200,000 to work with for the next phase of his financial plan.
Now let’s go back and change the time frame slightly. Let’s say our investor entered the market in Novermber 2003, instead of October 2002. How would he have fared this time? As it turns out, not very well. The investment he made in November 2003 would have lost an average of 3.5% per year for each of the 5 years until today. To put it another way, his original $100,000 would now be worth $83,500.
The lesson? Timing is extremely important in investing. We will delve into a detailed discussion of how to measure the time frame that’s appropriate for your circumstances. You may be under the impression that all you need to know is that you have 25 years until retirement, and that this will protect you from the short-term volatility of the stock market. That may have been ‘conventional thinking’ a few years back, but the market since 2000 has taught us that even long-term investors need to monitor their risk, and make adjustments to their holdings from time to time. We’ll show you how to do this.