Time in the market counts, not market timing

Time in the market counts, not market timingAt times like this, when investors are losing their heads left, right and centre, it can be tempting to have a go at timing the market.

This involves attempting to sell before the equity markets hit the bottom, and then buy again before they start to rise.

In 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.

One big problem 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.

According to Fidelity International, an investor who invested £1,000 in the FTSE All Share index 30 years ago but missed the best 10 days in the market since then would have achieved an annualised return of 7.09% and ended up with a total investment of £7,811.55.

That compares with an annualised return of 9.38% and investments worth £14,733.64 if they had stayed in the market the whole time – an opportunity loss of £6,922.09.

If the investor had missed the best 20 days, their annualised return would be 5.55%, which would have resulted in an even worse shortfall of £9,676.56.

According to Tom Stevenson, investment director for personal investing at Fidelity International:

“With the FTSE 100 recently falling 19% below the cyclical high of 7,122.74 reached last April, investors will be unsettled.

“However, it should be remembered that volatility is the price you pay for the long-term outperformance of equities over other asset classes. Corrections often provide investors with an opportunity to add to their portfolios at attractive prices.

“That said, our analysis shows the risks of trying to time the market and how expensive it can be when you get it wrong.  It’s difficult to predict the best time to be in and out of the market, especially as the best and worst days very often tend to be bunched together during periods of heightened volatility.

“It’s usually more prudent to stay fully invested through market cycles as missing even a handful of the best days in the market can seriously compromise your long-term returns. As the old stock market adage goes; time in the market matters more than timing the market.”

One area of value we add for our clients as Financial Planners is behavioural coaching.

When markets are especially volatile, we are there to coach our clients and keep them focused on their long-term investing objectives.

Because we know and can demonstrate the value of time in the market, and the futility of market timing, we are able to secure the best long-term results for our clients.

If you have been tempted to try a spot of market timing during the current bout of market volatility, why not give us a call and see if we can talk some sense into you?


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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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