We have seen volatility in the financial markets over the past year, and many investors believed they could take advantage of upswings or avoid downturns by timing the market. But does market-timing work?
Numerous forces drive the markets: economic measures, central-bank policy, and geopolitical events, to name just a few. The CBOE Volatility Index (VIX), which shows the degree of volatility the market may expect in a 30-day period, identifies events affecting the market and acts as a measure of risk.
For example, last year’s VIX spiked and dropped as it reflected events such as the drop in crude oil prices and Brexit. But despite some record spikes, most were short-lived, and 2016’s index closed quietly. Last year, most investors trying to time the market by buying and selling at “the right time” would have had difficulty predicting, and likely made more than a few mistakes.
Market-timing mistakes can be expensive. So instead of trying to time the market, most savvy investors plan well and stay the course. Diversification – the practice of spreading your investments among different asset classes and assets so your exposure to any one type is limited – can help reduce the volatility of your portfolio over time and provide you with an overall return that meets your comfort level.
It’s important to work with your advisor to develop an asset allocation that works for you over time. He or she is familiar with your individual circumstances, and can help you design a portfolio that stands the test of time.