Three is the magic number when it comes to investing

When is the right time to buy an investment and when is the right time to sell? Simon Glazier at AAB Wealth in Aberdeen gives some advice

For most people, the obvious answer to the question of investment timing is to buy when the price is low and sell when it is high.

But research suggests the opposite happens. People buy high and sell when prices fall which creates three problems. Firstly, when has the high been reached? Just because a share, fund or market index has reached a new high does not mean that it can’t go any higher.

A quick look at the FTSE 100 Index over the past 30 years shows it has reached all-time highs more than 40 times at least and arguably a lot more.

Many highs are followed by new, even higher highs.

When share prices do fall, then how fast, how much and how long will the falls be?

A fall for a day or a week and a quick recovery might happen too fast to be acted on, depending on how the money is invested.

Investment funds can take up to a week to buy or sell, and this is one of the arguments put forward by some fund managers and advisers for putting money into daily traded investments.

And what do investors do with the money between when they sell and when they buy back shares? Leaving it in cash will often mean losing value against inflation but putting it into a “safe haven” such as gold means it will be subject to the volatility and uncertainty of its price.

Moving into lower risk investment such as gilts and bonds will reduce risk but does not guarantee there will be no fall in value. The chances of you making the perfect call on these three factors every time is infinitely small and the chances of you making a good call every time verges on zero – just ask any mathematician.

Add to this the fact that every buy and every sell incurs a cost. You have to beat this cost just to break even.

How then should investors decide when to buy and when to sell?

Over the past 20 years, the FTSE 100 has made returns of more than 200%, including dividends. Globally, stock markets have made in excess of 300%.

Being in the market and ideally not just a single one but spread across all world markets is the best way of making money in the long term.

The best time to buy an investment is, therefore, when you have money to invest and the best time to sell is when you need the money to spend.

Anything else is speculation and a very expensive exercise in trying to predict the future.

BOARD GAME: A man watches Nikkei share prices change on an electric board of a securities firm in Tokyo, Japan