Why investors should forget market timing
Whilst many investors are tempted to time the market, copious research studies show that it is time in the market that counts.
The events of last year and the ongoing pandemic have inevitably caused a good deal of uncertainty in the minds of many investors.
When markets become more volatile, investor sentiment often turns negative, resulting in short-term falls in value. In such circumstances it can be tempting for some to try and time the markets.
Timing the markets involves attempting to sell before the equity markets hit the bottom, and then buy again before they start to rise.
It sounds good in theory. In practice, it doesn’t usually work out that way. Instead, you could find yourself selling low and buying high.
Repeat that process enough times and you will soon run out of money to invest. At the very least, the value of your investment portfolio will take a big hit.
One of the biggest problems with attempting to time the market is that you can easily miss out on a few of the best days of returns. Do this, and your overall long-term returns will be significantly worse. Some research by Schroders headed ‘the £19,000 cost of trying to time the markets’ shows just how costly this can be.
Our article below provides a picture of the typical performance characteristics of equities in developed markets, such as the UK, over time. It breaks down the performance of the UK equity market, represented by the FTSE All-Share index, through different economic and market conditions over the thirty years to the end of 2020. Please feel free to read or download it.
Taking an even longer timeframe, it should be remembered that the FTSE100 has averaged a return of 5% after inflation since 1900*, but it is never a smooth run. Returns come in fits and starts. That's what investing is about – accepting the short-term risk for the potential of longer-term benefit.
In uncertain times, you should remember these two important factors. Firstly, don't forget the power of reinvesting dividends. Whilst markets may be currently down from their peaks, if you have reinvested the dividends earned, you could have still significantly enhanced your returns.
Secondly, diversification can help. In a world of unpredictability, by spreading your investments globally, your investment journey will be a lot smoother. Different types of investments also have different risks and rewards, so it makes sense to hold a mix of equities, bonds and other asset classes in your investment portfolio.
Part of our role as Financial Planners is behavioural coaching. When markets are especially volatile, we are there to guide our clients and keep them focused on their long-term investing objectives, helping them keep their subconscious emotions out of the process.
Because we recognise and can demonstrate the value of time in the market, and the futility of market timing in most circumstances, we believe we can help secure the best long-term results for our clients.
So, if you have been tempted to try a spot of market timing during the current pandemic, why not give us a call to see how we can keep you on the right track.
*Barclays Gilt Equity Study 2016
Download "Time in the Market" Guide