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It was the best of times, it was the worst of times, it was an age of bullish markets, it was an epoch of economic volatility…
When it comes to discussions about investing, you’ve almost certainly come across the phrase “buy low, sell high”. And on the face of it, this seems like a very logical strategy to grow your wealth, as if it’s only a matter of timing the market.
As you’ll know, however, things are rarely so simple in practice as they are in theory! While trying to time the market can be tempting, taking a long-term approach can often be a much more effective strategy than trying to predict when the market will rise.
To underline this, it might be useful to take a look at an example of two investors. The first is overly active when managing his portfolio, while the second takes a long-term view of her goals instead. Read on to find out why the latter strategy can often be the most sensible one.
Trying to consistently time the market can be a Herculean task
Our first investor, John, takes a very active role in managing his portfolio. With a copy of the Financial Times in one hand and his smartphone in the other, he constantly strives to time the market perfectly, buying in dips and selling when prices spike.
But while he researches his investments carefully before he buys them, there’s just one problem with his strategy. Without the help of a crystal ball, nobody can accurately see the future and while John is well-informed, it would be impossible for him to know everything.
Investment markets are influenced by a wide variety of factors and taking them all into account can be a Herculean task. While John might successfully time the market once or twice, he’d definitely struggle to consistently do so over a period of several decades!
When you look back at missed opportunities with the benefit of hindsight, it’s easy to think that the signs were all there. But it’s important to remember that in the moment, it’s much harder to make a clear decision and if you get it wrong, it could have a serious impact on your wealth.
According to research by Schroders, if you had invested just £1,000 in the FTSE 250 in January 1986 and left it untouched for 35 years, by January 2021 it would have grown to £43,595. Of course, it’s important to note that this isn’t taking into account the impact of inflation or management fees.
But if you had tried to time your entry in and out the market, like John would, the outcome could have been very different. Over this period, if you had missed out on the FTSE 250’s 30 best days, that same initial investment would only be worth £10,627.
Taking a long-term view can help your investments to grow effectively
Our second investor is Rachel, who prefers to take a more long-term view for her investing strategy.
Like John, she carefully researches her investments before she makes them, as she knows it’s important to be well-informed. But unlike him, she believes that “time in the market, not timing the market” will deliver stronger returns.
The benefit of this approach is that she can rely on the general upward trend of markets in the long term. While you’d need to be incredibly lucky to consistently take advantage of fluctuations in asset prices, you only need to be unlucky once to wipe out a large portion of your wealth.
According to the Schroders study, over the last 35 years that £1,000 investment in the FTSE 250 could have grown by:
7% if you missed the index’s 30 best days
8.1% if you missed the index’s 20 best days
9.5% if you missed the index’s 10 best days
11.4% if you stayed invested the whole time.
As you can see, while it can be tempting to attempt to time the market, staying invested can reduce your exposure to risk and help you to see strong returns.
Sticking to your long-term plan is often the best course of action during market volatility
At the end of the day, no matter how well-informed you are, it can be nearly impossible to consistently time the market. After all, there are fund managers with decades of experience and whole teams of researchers who still get it wrong at times.
Even though it can be nerve-wracking when the value of your assets falls, the long-term “buy and hold” strategy is often more useful. As you can read in another article, a properly diversified portfolio can help to minimise the impact of market shocks and deliver reliable investment returns.
During periods of volatility, sticking to your long-term plan is often the most sensible solution, as over time, the general upward trend of markets smooths out the effect of any dips. This can give you peace of mind to know you’re still on track to reach your life goals.
Get in touch
If you want to know more about your investment strategy and how it fits in to your financial plan, we can help. Please email us at info@athertonyork.co.uk or call us on 0208 882 2979.
Please note:
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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