There’s a lot for investors to worry about. High market valuations, rising interest rates, the prospect of a no-deal Brexit and escalating trade tensions fuelled by Donald Trump, all raise the likelihood of greater market volatility.
When markets are more volatile and investor sentiment turns negative, resulting in short-term falls in value, it can be tempting to try and time the markets. Timing the markets involves attempting to sell before equity markets hit the bottom and then buying before they start to rise. This sounds good in theory but, in practice, it doesn’t usually work out that way. Instead, investors can find themselves selling low and buying high! If investors repeat this process enough times they will soon run out of money to invest. At the very least, the value of their portfolios 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. According to a study from Fidelity International a couple of years ago, an investor who invested £1,000 in the FTSE All-Share index 30 years ago, but missed the best 10 days in the market, would have achieved an annualised return of 7.09% and ended up with a total investment of £7,811.55. This compares with an annualised return of 9.38% and an investment worth £14,733.64 if they had stayed in the market the whole time – an opportunity loss of £6,922.09. If an 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.
This research should remind us that volatility is the price we pay as investors, for long-term outperformance from equities, relative to other investment asset classes. The potential for long-term returns comes from risk in the form of market volatility.
There are significant risks associated with trying to time the markets. This is because it is so difficult to predict the best time to get out and then get back in to equity markets, during periods of market volatility. These risks are magnified by the impact of the very best and worst days of market performance tending to be grouped together during periods of increased market volatility.
A more sensible approach to investing is to keep your money exposed to the markets throughout the entire market cycle, during the ups and the downs. There’s an old stock market adage which says time in the market matters more than timing the market. At Wells Gibson, we would tend to agree.
When markets are especially volatile, the value we add as financial planners, is to guide our clients and keep them focused on their long-term, lifestyle, financial and investment objectives. Furthermore, because we 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 market timing in the past or perhaps, during the current bout of market volatility, why not give us a call and see if we can keep you on the right track.