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Investing on the stock market can be an emotional rollercoaster, in good times and in bad. Though underperformance can create panic and fear, so too can overperformance – namely, a fear that a drop may be imminent.
It’s understandable, then, that some investors attempt to “time the market”, moving their money to try and avoid experiencing downturns while still taking advantage of highs. The strategies that these investors often use are fundamentally flawed.
When it comes to investing, patience and consistency are far more important qualities than cunning.
Read on to learn more about why time in the market is likely to create more opportunities to grow your wealth than attempts to time the market.
1. Historically, stock markets have grown more than they have shrunk
Market volatility can be nerve-wracking for investors, but historical data can provide helpful insights that may offer a new perspective relating to investment cycles.
Global events such as the 2008 financial crisis, Brexit vote, and dot-com bubble have all caused stock markets to underperform, which can cause your portfolio to fall in value. The good news is that markets tend to recover, and often recoup the losses experienced during the downturn swiftly, as you can see in the graph below.
Source: Schroders Personal Wealth
So, even though you may understandably feel nervous about your investments during market volatility, historical data suggests that any losses you experience are unlikely to derail your portfolio permanently.
If you remain invested in a balanced portfolio, it may be possible to recoup losses over time.
It’s important to remember that past performance cannot guarantee future performance.
2. Compound returns could reward long-term investing
One of the greatest benefits of holding investments for longer is the impact of compound returns.
This is the process of generating returns on the entire value of your portfolio, including your deposits and returns from previous months or years. If you choose to reinvest these returns, it could create significant growth, particularly if you hold your investments for many years.
The table below demonstrates how reinvesting your returns and holding your investments over the long term could help you to grow your wealth more quickly than if you were to move your money around or withdraw your returns as dividends each year. It assumes a £10,000 initial investment with annual growth of 2%.
Source: Barclays
As you can see, compound returns offer a compelling incentive to invest over the long term.
3. It’s virtually impossible to miss the worst days in the market without also missing the best
Investors who try to time the market use risky strategies in an attempt to miss the worst days on the market – that is, the days when the stock market experiences a drop in value – while still benefiting from the best days, when the market rises in value.
This is virtually impossible to do, because historical data demonstrates that the best days in the market tend to come immediately after the worst.
According to a report by J. P. Morgan, between 1 January 2003 and 30 December 2022, 7 of the 10 best days happened within 2 weeks of the worst 10 days. Moreover, the second-worst day of 2020 – 12 March – was immediately followed by the second-best day of the year.
As such, the chances of being able to reinvest your money in time to benefit from the recovery are remarkably slim. And the impact of attempting to time the market can be catastrophic for your portfolio.
The graph below shows how a portfolio worth $10,000 invested in the S&P 500 between January 2003 and December 2022 would have grown if it had remained invested throughout the entire time or if the investor had missed the best market days of that period.
Source: J. P. Morgan
As you can see, the more “best days” you miss, the more likely you are to notice underperformance in your portfolio. Indeed, in the worst-case scenario, your portfolio could even lose value over that time.
Your planner can help guide you through market uncertainty
While it’s understandable that market uncertainty or volatility can be nerve-wracking, acting on those emotions is usually unwise.
Your planner has plenty of experience of market volatility, so they can shed light on the news headlines and ensure you make the most sensible decisions for you based on your goals and circumstances, rather than panic or fear. Consequently, you could feel more confident about the investment decisions you’re making.
Get in touch
If you’d like to learn more about how we can help you to manage your investments through good and bad times, please contact us today.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
