One of the most important aspects of investing over the long term is resisting
the temptation to change your portfolio in response to short-term market movements.
It can be tempting during times of stock market uncertainty to delay making new
investments, or even to sell current holdings, with the aim of investing when fund
prices are lower.
"Timing" the markets like this sounds attractive in theory but, in our opinion,
it seldom works in practice. So if your personal circumstances and investment goals
are unaltered, and you are still able to take a medium-term to long view, it is
often best to "sit tight" when the direction of the markets is unclear.
Just as the sharp falls in stock market tend to be concentrated in short periods,
the best rises happen quickly. And since these gains often occur just before, or
after, a market fall, an investor who tries to time the markets is highly likely
to miss out.
To illustrate this point, we have looked at the returns from the Saudi stock market
between 1994 and 2006. Our analysis shows that missing just a few of the best days
can significantly affect performance.
Missing the ten best days over this 12-year period (less than one day a year) has
a significant impact on annualized returns, while missing the best 40 days cuts
returns from 22% to 6.9%. So, far from minimizing investment risks, market timing
seems to be a high-risk strategy.