It's Just A Matter Of "Time"

August 20, 2014 4:48:00 PM

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. - Peter Lynch

matterAs we move into the final stages of summer, we are finally beginning to see more volatility in the stock market. From my perspective, it's about time!

As we have said many times, volatility is what creates great opportunities to invest in great companies on sale, over time.

Although many investors would probably love and prefer the stock market to go straight up, that is logic I have never been able to understand. I realize that many investors like to look at their investment statements each month to see if they have made or lost money (by the way, bad idea!). But, the fact still remains that as an investor, you don't make or lose money in an investment until it is sold.

Why don't I understand the investor's logic behind wanting the stock market to go up all the time? The answer is simple. If you are an investor that is continually looking for opportunities to invest, it would be natural to assume that you would want to purchase your investments on sale, right?

Let me put it another way; When you go to the grocery store to buy your groceries, would you like prices to rise or fall? Or, when you go to your local mall to purchase new clothes or the dealership to purchase a new car, would you like prices to rise or fall?

In other words, I don't know anyone that does not like a sale! Therefore, if you don't plan on selling an investment for an extended period of time, wouldn't it stand to reason that you would like to buy your investments on sale as well? Of course!

Unfortunately, studies show that historically, investors do not invest as if they would like to buy their investments on sale. In fact, according to a study shown in the chart below, it is clear that investors will try to time when to buy their investments and/or sell their investments.

Why is it that investors try to time the market?

It is no secret, there have been many studies done on investor performance compared to the S&P 500. The studies continue to show that investors under-perform. Why do they under-perform? Because they try to time when they think they should buy or sell and unfortunately, they are usually wrong! Including buying when investments are NOT on sale!

Here's another thought; Maybe you have timed the market in the past and you were right when you got out. But, were you right when you got back in? Maybe you were right getting back in. Kudos, you went 2 for 2! However, no one bats 100% forever. Eventually, you will strike out. The problem is, you don't know when that will happen. But, when it does, it may just cost you a lot of money. Just look at the investors who got out of investing in equities three, four or five years ago and are still trying to figure out when the right time to reinvest will be (while we continue to move to all time highs).

I have several theories as to why investors try to ime the market. However, at the foundation of my theories lies one common fact; Many investors lack Investment Clarity.

What does Investing With Clarity mean?

Why do many investors lack investment clarity? In my opinion, the answer is simple; Many investors have no clue what investments they own - or, as I prefer to say, many investors don't know what companies they own in their portfolio. Not only that, but because they don't know what they own, they probably don't have the flexibility to take advantage of buying more of those companies when they go on sale. I believe that is very unfortunate.

Therefore, because investors don't know what they own, when markets become more volatile or scary for investors, their natural reaction is to sell their investments. Unfortunately, they sell their investments without having a full understanding of the fundamentals of the companies they own because they don't know what companies they own!

Now, throw in the emotional components and the psychology behind investor behavior and you have a recipe for disaster!


Why is Investing With Clarity so important?

As in life, clarity should be a key component to making any investment decision. History has clearly bore out, if you invest in great companies over time, you should be a successful investor.

Of course, there are many moving parts to the investment process besides the idea of staying the course as opposed to timing the market. This is where an investor should also have Clarity on their investment Philosophy and Strategy.

I believe an investor who has a solid investment philosophy and strategy and the Clarity to continually invest in great companies over time will not become one of the statistics of investors that have poor investment performance.

At Nepsis, we call it, Investing With Clarity.




Mark Pearson

Mark Pearson

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