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Should you time the market?

You wait for the perfect time - to change jobs, to move, to go back to school… to invest. Even though such a time may exist, you can easily miss out on the opportunity when it comes along and end up kicking yourself.

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This is true in all areas of life, especially personal finance. Even though you may be tempted to try to time the market – with the goal of investing the day before a bull market starts and cashing out at the top or to sell just before a falling market to limit losses – such a strategy could cost you dearly. You could miss the most profitable days in the market or invest right before an unforeseen event sends stocks plummeting. When it comes to investing, staying in the market as long as possible by investing your savings on a regular basis is often the most promising strategy. It also frees you from stress and potential regrets.

We demonstrated this principle when the markets were roiled at the start of the pandemic (Should you try to time the market?). Has the volatility of recent months challenged this concept? Once again, let’s look at the example of our three investors: Simon, Isabelle and Zineb.


After investing their initial amount of $10,000 in 1987, they each saved $100 a month for 35 years, from 1987 to 2022, and invested it in the same mutual fund, but using three different tactics. Our three investors have gone through the same major crises: the stock market crash of 1987, the technology bubble of the 2000s, the financial crisis of 2008, the Covid-related correction of 2020 and the selloff of 2022.

  • Simon: the unlucky investor
    Simon deposits $100 into a savings account each month and constantly monitors the markets as he waits for the perfect opportunity to invest. Unfortunately, he’s unlucky and always chooses the worst time to invest his accumulated capital. Each time, he invests his savings just before a major stock market correction. Simon’s investments are now worth $202,411.
  • Isabelle: the lucky investor
    Like Simon, Isabelle deposits $100 into a savings account each month and constantly monitors the markets while waiting for the perfect opportunity to invest. Luck is with her: each time, she invests while the markets are bottoming. Isabelle has been able to benefit from rebounds and she has never sold. Isabelle’s investments are now worth $308,523.
  • Zineb: the regular investor
    Zineb decided not to monitor the markets. She systematically invested her $100 monthly contributions directly into her investment account. Every month, for 35 years, $100 was automatically deposited into her account without her having to worry about it. Zineb’s investments are now worth $335,618.

Evolution

*Calculated from the MSCI Canada Index. Source: FÉRIQUE Fund Management.

What can we conclude?
Trying to time the market is the investor’s greatest enemy. Whether you’re lucky or not, studies show that people who give in to this temptation usually detract from their performance rather than enhance it.


Three solutions to keep you on track

1. Periodic investment
If you save and invest systematically, the same amount will be invested regardless of what happens, and the acquisition of your investments will be independent of market fluctuations. In addition, periodic investing promotes discipline, which puts investors on track to achieve their goals.

2. Investment diversification
Diversification means you avoid concentrating your investments in the same asset classes. A well-diversified portfolio will be less affected by volatility and will stay true to the investor’s risk tolerance and objective. In addition, by maximizing compound returns, optimal diversification can help investors achieve their goals faster.

3. Portfolio rebalancing 
The equilibrium of an investment portfolio is precarious because the market constantly fluctuates. This precariousness means that assets have to be rebalanced periodically to prevent the portfolio from deviating from its target. The main function of rebalancing is to preserve a portfolio’s risk-return balance, which prevents investors from departing from their savings strategy.

Do you have an effective investment strategy?
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FÉRIQUE is a registered trademark of Gestion FÉRIQUE and is used under license by its subsidiary, Services d'investissement FÉRIQUE. Gestion FÉRIQUE is an Investment Fund Manager and assumes management duties in relation to the FÉRIQUE Funds. Services d'investissement FÉRIQUE is a Mutual Fund Dealer and a Financial Planning Firm, as well as the Principal distributor of the FÉRIQUE Funds. Please note that for commercial purposes, Services d'investissement FÉRIQUE is also known in English as FÉRIQUE Investment Services.

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The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all  distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns.

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