The adage ‘buy low, sell high’ might sound like a sensible idea to get the most out of your money. In reality, this is very hard to do and it is not as simple as timing the market. Timing the market involves trying to second-guess the ups and downs, with the hope that you will buy when prices are low and sell when they are high.
A number of factors, including economic and political, influences investment markets and taking all of these into account to make investment decisions is challenging. It is easy to think, with the benefit of hindsight, that the signs were obvious when you look at past market fluctuations and missed opportunities. However, at the time, it is rarely the case and it is far easier to make a mistake that you could regret in the future.
It is near impossible to consistently time the market and, if it is done, it is normally down to luck. Even experienced fund managers, with teams and resources behind them to research and support decisions, get it wrong at times.
The impact of getting timing wrong
All investments come with some level of risk. However, research from earlier this year carried out by Schroders has highlighted the risk of getting it wrong when you try to time investment markets.
If you had invested £1,000 in the FTSE 250 at the beginning of 1989, and left it there to the end of 2019, it could have been worth £26,831, which is an annualised return of 11.6% p.a. (Bear in mind, of course, that past performance is no guarantee of future returns).
However, the outcome would have been very different if you had tried to time your entry in and out of the market. If you had tried to time the market and missed out on the index’s best days the same investment would be worth far less:
- Missing the ten best days would have resulted in returns of 9.6% p.a.
- Missing the best 20 days would result in returns of 8.2% p.a.
- Missing the best 30 days would result in returns of 7% p.a.
If you had missed the best 30 days, the initial £1,000 would have been worth £7,543 – over £19,000 less, not adjusted for the effect of charges or inflation. Even the 2% difference between remaining invested for the whole time and missing the 10 best days might not seem like much. However, when you take into account the effect of compounding, missing the best 10 days would have cost you a little over £11,000.
Of course, during the 30-year period, investment markets experienced volatility. At times, the value of investments will have fallen, and it can be extremely tempting to sell at these points even when you are investing with clear, long-term goals in mind.
Nick Kirrage, a fund manager on the Schroders value investing team, said:
“You would have been a pretty unlucky investor to have missed the 30 best days in 30 years of investing, but the figures make a point: trying to time the market can be very, very costly.
“As investors, we are often too emotional about the decisions we make: when markets dive, too many investors panic and sell; when shares have a good spell, too many investors go on a buying spree.”
In that 30-year period, there were some major market crashes including the bursting of the dotcom bubble at the turn of the millennium and the financial crisis in 2008/09. Ironically, many of the stock market’s best days come in the wake of the worst days.
Evidence of this can be seen with the recent market volatility experienced in 2020. The biggest daily fall in the FTSE 250 since the beginning of the year occurred on 12th March when it dropped 9.35%. Yet 12 days later, the FTSE 250 rose by 8.37%. In fact, since the beginning of 2017, the four worst days and the four best days for the FTSE 250 occurred in a 29-day period in March and April of this year.
The importance of time in the market
So, if timing investments isn’t an appropriate strategy for the average investor, what is? For many, the adage ‘it is not about timing the market, but about time in the market’ rings true.
Holding investments during volatile periods can be nerve-wracking when values fall and a ‘buy and hold’ investment strategy is often more appropriate. Building a diversified investment portfolio matched to your risk profile is fundamental in the work we do as financial planners and holding these investments over the long term can deliver returns that are more reliable than trying to time the market.
With dips in the market, it can be difficult sticking to your long-term investment plan but, for most investors, it is a strategy that works. As volatility is to be expected, you should not invest with short-term goals in mind. Ideally, you should intend to invest for at least five years. This gives the volatility experienced an opportunity to smooth out.
How Nelsons can help
For further information on the subjects discussed in this article, please contact a member of the Investment Management team in Derby, Leicester, or Nottingham on 0800 0241 976 or via our online form.