It Is Time Not Timing That Reaps Rewards
“Is this a good time to invest?” This is one of the questions wealth advisers are frequently asked, and the answer is “yes” more often than not. In order to protect the value of your savings from inflation, it is generally better to be invested for the long-term rather than wait in the sidelines for a ‘right time’ to invest or trying to time the markets.
Unpredictable events and investor sentiment can have a negative or positive impact on markets, often unexpectedly, and no-one can predict the future. In order to successfully time the markets you would need to accurately identify both the best time to buy and the best time to sell, and even very experienced investors cannot get this right. You would need to somehow foresee all the factors and trends that contribute to market performance; reacting to current conditions is usually too late.
Time in the markets is the wiser strategy for most investors rather than timing. Every market cycle has up and down days. Often a few very good days account for a large part of the total returns over a market cycle. The real risk of market timing is missing out on the best performing days. If you are not invested, for example because you are waiting for share prices to stabilise after a period of volatility, you are likely to miss out on the sudden market rallies that could improve your long-term wealth.
You should work with a professional wealth management adviser like Blevins Franks to ensure your investment portfolio is suitable for your objectives and circumstances, and designed to spread risk. Blevins Franks specialises in providing personalised wealth management advice to expatriates living in Spain, France, Portugal, Cyprus and Malta.
There are many statistical examples to illustrate the cost of being out of the market.
Goldman Sachs calculates that a hypothetical investment in the US S&P 500 index from 1992 to 2011 would have generated an average annual total return of 7.81%, if invested for the whole 5,046 days. If however you missed the 10 best days your average annual return would only be 4.14%. If you missed the 40 best days, you would have made an average annual loss of 2.31%. This loss increases to 7.2% a year if you missed the 70 best days.
BlackRock have a similar illustration using the FTSE All-Share index. A hypothetical £100,000 investment would have grown to £598,478 over the 20 years from 1st January 1991 to 15th August 2011. If you missed the five best days your return would be £186,738 less. If you missed the 25 best days your investment would only have grown to £172,955.
While volatility and down periods can be testing for investors, they form part of every market cycle. Short-term declines should not detract from the long-term potential of stockmarket investing.
Blackrock have an interesting chart tracing the S&P 500 index from 31st December 1985 to 31st December 2010. It lists the key events that affected the market over his period, including the 1987 stockmarket crash; first Gulf war in 1990; September 11th, 2003 Iraq war, subprime crisis and collapse of some of Wall Street’s biggest names in 2008.
Even with these tumultuous events and resulting volatility, an investment in the US S&P 500 equity index on 31st December 1985 would have grown to over 10 times its original value in 25 years.
Emotions can also cause people to effectively try and time the market. They sell in falling markets because they are afraid of remaining invested, and lock in their losses as a result. They buy in rising markets as they chase returns, but could end buying just as the market peaks. Too many investors end up buying at market highs and selling at market lows. Markets often suddenly rebound from their lows, but they miss out.
A study by Barclays Wealth last year showed the potential dangers of letting emotions control your investment decisions. Entitled Risk and Rules: The Role of Control in Financial Decision Making, it surveyed 2,000 high net worth individual investors. It found that investors who make investment decisions based on emotion rather than strategy lose on average up to 20% of their potential returns over a 10 year period.
The study also found that people who employ an investment strategy tend to feel more satisfied with their financial situation. The group with the highest strategy usage is 12% wealthier than the group with the lowest strategy usage.
Portfolio performance is more significantly determined by asset allocation and diversification than market timing. A wealth management professional like Blevins Franks would review your investments and objectives and help you develop an effective tailor-made strategy going forward.
While we may advocate the “buy and hold” strategy, this only applies if your portfolio was designed for your specific aims, situation, risk tolerance and time horizon. Also, buy and hold does not mean buy and ignore. Your portfolio should be reviewed at least once a year to see if it needs re-balancing or if your circumstances have changed, something which Blevins Franks does for their clients.