Finance and Investments

Most of us have heard the saying ‘it’s time in the market, not timing the market that’s important’. During the turbulent times of 2008 and early 2009, however, it was difficult to believe.

When the global share markets (as measured by the Morgan Stanley Capital Index) fell by 54% from the peak in 2007 to their nadir this year, everything looked, sounded and felt extremely gloomy. We didn’t know which overseas bank was going to fail next and unprecedented emergency measures were being taken by governments around the world.

Our instincts were to cash up and run for the bank – and many investors did just that. Those who managed to time the market, selling all their shares at the end of September 2008 as investor sentiment began to crumble, did well if they bought into the market again in March 2009. The ability to pick the top and then the bottom of the market took extraordinary investment acumen... or two strokes of extreme good fortune!

Of course, picking the right time requires precise timing. Sell a month or two early or late and the consequences can be dire. For example investors who stayed out of the market from the lows in March this year would have missed the significant and speedy rebound of 55% in the MSCI by the end of September.

Compare this with the investor who chose to sit tight, and stayed fully invested throughout this tumultuous time. Had they invested only in shares (a high risk/high growth investment strategy), they would have suffered the initial 38% loss but then would have recovered substantially with only a small loss of 4% six months later, at the end of September. An untimely exit from a depressed market would have been costly.

Who stayed the course? Those with a plan – yes I know you have a budget, a house, a job and an investment portfolio, but that does not really mean you have a plan in the sense that I mean.

If you want to build wealth and security a financial plan is essential – I am not making this up, there is research to prove it.

You know if you are focused on a goal you are more likely to achieve it – and nothing brings goals into focus like putting them in writing. A plan will also help you identify your wildest dreams which may turn into achievable goals. It will also help you identify what risks you are taking and work out an exit strategy if the risk becomes unbearable for you.