Timing isn’t everything (for smart investors)
The slings and arrows of global financial markets have made generations of journalists wax lyrical.
So events following the 2007/8 crash were framed as the Great Recession, 1987 was christened Black Monday and 1929’s Wall Street crash fallout was dubbed Great Depression. And don’t forget the Credit Crunch of 1966, the South Sea Bubble of 1720 and the Tulip Bubble of 1636.
And following an unusually stable market in 2017, a large correction in early 2018 and Red October have convinced some nervous investors to withdraw.
(Source: fortune.com)
We don’t want to underplay the serious impacts of these events. But in terms of securing healthy returns, the investors who emerged most unscathed held their nerve, rode market turbulence fuelled by financial/geopolitical events and profited long-term.
Here’s why ‘time in the market, not timing the market’, is the best approach.
Strength in staying invested
Buying low and selling high in reaction to bullish or bearish markets might seem like the acme of investment, but without a crystal ball, predicting future fluctuations is impossible. And missing the best market days because you cut and run when things get rocky means you could lose out massively.
For our purposes, ‘staying invested matters’ is the most pertinent of JP Morgan’s principles for investing and their research provides further evidence.
(Source: am.jpmorgan.com)
They tracked a $10,000 investment in the S&P500 index over 20 years and it generated a decent 9.85% return per annum.
But if the same investor had withdrawn from the market temporarily and missed only the 10 biggest days from a total of 7,304, the returns fell to 6.1% (a $32,665 gains decrease).
This is food for thought for anyone who withdrew from the market during 2018’s two major adjustments and proves there’s strength in staying invested.
Expert views
Investment gurus Warren Buffet and Ray Dalio also agree that holding onto investments for the long term is the most prudent approach and knee-jerk reactions to volatility are unwise.
(Source: cnbc.com)
Buffet emphasises that ‘the money is made in investments by investing in and owning good companies for long periods of time’ and Dalio warns against selling when the market begins to drop, saying that ‘you cannot possibly succeed that way’.
Humphrey Thomas, CEO of Thomas Wealth Management also advised that ‘buy and hold’ is best in a recent CNBC article, stating ‘markets rise and fall continuously and when they’re down it can be tempting to pull out. Commit to your long-term strategy and stay the course’.
Sensible approach
According to Prudential, equity and bond investments are the best long-term asset class.
Their figures for 1989 – 2014 show that average annual return for UK investments in equities was 5.2%, bonds 4.6% and cash -0.08%. So while cash carries less risk than either of the first two options, thanks to low interest rates and rising inflation, it’s certainly no longer king.
For UK and global equities, the general consensus is that the longer an investment is held, the lower the risk of losing money, with investments held for 10 years or more performing particularly well.
So the most sensible approach is getting professional financial advice, having a balanced portfolio with a spread of investments and investing for the long-term.
Long-term investors who stay the course tend to make money in any index, whether it’s the FTSE100, S&P500 or Hang Seng — proving that ‘time in the market’ is time well spent anywhere.
If you need sensible financial management advice, call 01204 526846 to chat
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