We've all heard the old investing adage "buy low, sell high", but can most investors follow this investing strategy? The answer is rarely. Moreover, most likely investors not only fail to do that, but also do the opposite, since the temptation is to get into the market when times are good and then bail out when times get tough. To time the ups and downs in the market is difficult, even with investment expertise. Alternatively, an investor may engage in the market during its downturns if lucky; however, performance will not improve by not timing the market.
Example: Three investors engaged in the market by investing $10,000 in the Hang Seng Index every year for 20 years, from 1987 to 2006. Investor A is the smartest and enters the market at the lowest month-end price each year (either we don’t believe this is possible or he must be a fortune teller); investor B invests with trading discipline at the end of every first month of the year, on a yearly basis; and investor C, the so-called bad luck investor, invests at the highest month-end price each year.
Assume each point of the HSI equals HK$1 From 1987 to 2006 Total Contribution: HK$200,000
In the above table, for this 20-year investment period, the difference in returns for these three investors is insignificant. Note that the difference in returns between the smart investor and the disciplined investor is less than 1%.
Therefore, discipline and not timing the market are the most critical investment behaviours for long-term investments. Be a disciplined investor and relax, happiness and rewards will come to you.
Prudential Corporation Asia
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