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17 May, 2018

Tuning Out the Noise

There is a truism to investment which is that it is not timing the markets that delivers returns, but time in the markets.  This is a little unsatisfactory as the bumps along the way can be pretty distracting, and when you buy and sell your investment can make a huge difference to the eventual outcome.  This means that it is very tempting to try and 'dabble' in one's investments; to improve the return that simply sitting back and waiting will deliver.

However whilst of course it is possible to improve returns by successfully reading the tea leaves and accurately predicting the future - the majority of people who try to do so lose out by that endeavour, and not only spend time and emotional capital in the attempt, but more importantly end up with less money than if they had simply accepted the market return for the level of risk they take along the way.

The most common argument for an active timing strategy is how bad things can be if you invest at the peak, and over the short term that's true.  But investment is not a short term activity, and here in an article from Dimensional Fund Advisors we examine what would have happened to an investment made in May 1999 - close to the peak of the dotcom bubble, and whether almost 20 years later the outcome is actually that bad.

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by John Stirling