“Timing is everything”. There are many different variations of this quote, however – whether it’s planned or by chance – the impact of timing can be the single difference between celebrating success and languishing in failure. Here’s why it’s not a good idea when it comes to retirement planning.
In the investment industry, it’s instilled in us that it’s impossible to consistently and successfully time the market. History is proof of this as there have been many failed attempts to do so, and while there are a relatively small number of successful investors, they have also been wrong a large percentage of the time. When it comes to retirement planning, that can be disastrous.
Here are two key reasons why trying to time the market is dangerously risky:
1. Timing risk
‘Timing risk’ is defined as “the speculation that an investor enters into when trying to buy or sell a stock based on future price predictions.”
When a portfolio manager purchases a stock, they do so with the intention that there will be a positive return at some future date. This future date is undefined and mostly in direct contrast to the thinking required when managing your own retirement savings and investments. You have your own specific needs and events, and your own desired date of retirement. And these may, of course, change for you – one of many reasons why it’s important to review your personal retirement plan with your financial planner regularly.
2. Life-cycle risk
In 2019, South Africa won the Rugby World Cup and the entire country celebrated. In fact, some are still celebrating. This was truly an exceptional achievement and came at a time when a generally dispirited nation needed inspiration. As the memory of this event remains front of mind for many South Africans, the same memory will linger as a sore point for English rugby supporters for years to come. Why is this relevant? The English rugby team actually gave us a great example of how not to plan for retirement.
Overall, the last 5 years have not been kind to the South African equity market. Apart from a positive turnaround in 2017, we have seen local stocks underperform South African bonds and cash in 3 of the last 5 years. So, how do we ensure that our retirement savings do not perform like England in the Rugby World Cup? England had a stellar performance throughout the majority of the tournament, only to collapse at the end when it counted the most.
The question we need to ask ourselves is: if we cannot successfully time the market over the short term, when it can have such a large impact on our retirement value, are we supposed to leave our future way of life at the mercy of where the market is in ‘the cycle’? The answer is no.