Stock Market History: A Crash Course for Investors, Part 4

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Part 4 of an eight-part series on the lessons to learn from stock market history explains that although it’s very tempting to try to time the market, in fact it’s virtually impossible to do it successfully. Far better than focusing on short-term ups and downs is to invest for the long term. In other words, it’s not TIMING the market, but TIME IN the market, that really counts.

Presented by Robin Powell. Expert analysis from Richard Wood, Elroy Dimson, David Chambers, Weston Wellington and Janette Rutterford.

So, we’ve explained why market history shows we need to be realistic as investors – and also to keep calm when others are letting their emotions get the better of them.

Now for a lesson that few very people – least of all the so-called experts – have managed to learn.

And it’s this… Don’t try to time the market.

The money pages and the business channels are always telling us now is the time to buy or sell.

But although it sounds a very seductive proposition, all the evidence is that market timing is a pointless and often costly exercise.

Professor Dimson is co-author of the world’s most detailed on-going study of global investment returns.

He and his colleagues looked at markets in 20 countries from 1900 to the present day and tested a strategy that sold equities and moved into cash every time throughout that period when price-to-dividend multiples went significantly above their historic average -i.e. whenever shares appeared overpriced.

But in all 20 countries the strategy fared worse than simply buying and holding. In some cases it inflicted outright losses.

But of course for market timing to work, it’s not enough to spot when prices are about to fall. You also need to identify when they’re ready to rise again. And that is every bit as difficult to do.

So, buy and hold really is the best strategy.

And because there’s no way of predicting short-term ups and downs, you might want to consider drip-feeding money into the markets instead of investing it all at the same time.

This approach, sometimes known as pound- or dollar- cost averaging, particularly suits the more risk-averse.

We’re now halfway through our six key lessons to learn from market history. Join us again for the next lesson in Part 5.