An inexperienced investor could profit more by investing a given amount at fixed intervals, like an ant, rather than following a strategy linked to the timing of entry and exit from a given asset, which often proves to be unsuccessful. This was revealed by ING research, which lays bare all the difficulties of market timing: an example is represented by the drop in gold recorded in March (-10%) after repeated historical records and despite the persistence of tensions and geopolitical risks.
“Investors who saw the war as the right time to invest in defense shares or gold were disappointed,” underlines Jacco de Winter, Knowledge Manager of ING Investment Office, recalling that the MSCI World Aerospace & Defense index reached its maximum on Monday 2 March, the first day of trading after the outbreak of the war, and then fell back. The same happened for gold, which hit a peak on March 2 and has since fallen more than 10%.
Buy on expectations
According to the expert, the problem lies in a well-known stock market adage: “buy the rumor, sell the news”. Investors, in fact, do not react so much to the news itself, but rather to the expectations that precede it, and so prices move mainly based on expectations, not on events. Defense stocks, for example, had already seen strong increases for some time, thanks to NATO countries’ plans to significantly increase defense spending, and the start of hostilities in Iran only confirmed this intuition, advising investors to realize profits. A similar mechanism also applies to gold, where geopolitical tensions did not emerge suddenly, but intensified.
The “buy the rumor” principle is also often observed in individual stocks. Nvidia, for example, has risen a lot in recent years, not so much thanks to the quarterly results – although very solid – but to the fact that investors had already anticipated them and the day after the results were published, the share price often fell.
Because timing is so difficult
This is an important lesson for those starting to invest. Intuitively, it may seem logical to buy defense stocks when a war breaks out, but by then it is often already too late. Breaking news or the confirmation of an expectation more often turns out to be an exit point than an entry point. But this presupposes that you already have the securities in your portfolio. In retrospect everything seems simple, but in practice it rarely is.
The same goes for investors who believe they can avoid a market correction by getting out “in time.” But who really manages to sell at the highs and then return exactly to the lows? Historically, investors have lost more returns by anticipating corrections than by the corrections themselves.
So what should you do?
Who tends to benefit when trying to do market timing? Only the broker benefits from timing, collecting commissions on purchase and sale transactions, which are often useless in hindsight. This is why it generally makes sense to stay invested and make regular investing a habit by paying in a fixed amount on the same day each month. In this way you invest sometimes at higher levels and sometimes at lower levels, but in the long term rarely at the wrong time.
