What is the true cost to your wealth of attempting to time the market?
Successful investing is simple in principle – all you have to do is “buy low and sell high”.
The reality of investing tends to be far more complex than this. Markets are highly unpredictable, and, unless you have a crystal ball, forecasting price movements – and the timing of these movements – is all but impossible.
Instead, it might be wise to heed another valuable investing principle: “time in the market, not timing the market”.
According to interactive investor, attempting to time the market could cost UK investors 7% of their annual returns when compared to a “buy-and-hold” strategy.
Continue reading to discover why many investors try to time the market, and why this practice could hamper your portfolio's long-term performance.
Timing the market could reduce your investments’ potential growth
Markets are incredibly complex ecosystems influenced by numerous factors, including:
Economic and geopolitical events
Company performance
Investor sentiment
Natural disasters.
Due to the inherent unpredictability of these events, volatility and uncertainty are unavoidable aspects of investing.
As a result, you might feel tempted to try and “time” the market by selling your investments to avoid a potential downturn, then repurchase them after markets stabilise.
While this strategy might seem lucrative, predicting market movements is incredibly difficult; even the most respected fund managers often get it wrong.
Market declines can also trigger fear and panic, especially when your hard-earned wealth is on the line. In these moments, you might react impulsively based on short-term emotions, selling your investments in an attempt to “time” the market.
On top of this, constantly reading news headlines about market downturns can breed anxiety. This, coupled with witnessing friends and colleagues selling their investments, might foster a “fear of missing out”, potentially leading you to follow suit to “protect” your wealth.
It’s vital to remember that doing so could actually hinder your portfolio’s long-term growth – read on to find out how.
If you sell off your investments, you might miss out on the market’s best-performing days
If you attempt to time the market, you won’t just miss the worst-performing days – there’s a chance you’ll miss the best-performing days, too.
This is because historical data shows that the market’s best days often follow a period of decline.
Research from Visual Capitalist shows that, over the last 20 years, 7 of the 10 best days for the S&P 500 index occurred in the throes of a bear market. Many of the market’s best-performing days occurred shortly after its worst days.
For instance, in 2020, the second-best day came immediately after the year’s second-worst day. Similarly, the best day in 2015 occurred only two days after its worst day.
If you sell your investments to cut your losses with the intention of buying them back at a lower price, you might miss out on some of the market’s best-performing days, jeopardising your chances of benefiting from the subsequent recovery.
The effects of missing these best days can be significant for your portfolio. Consider this table, which shows the impact of missing some of the market’s best days based on a hypothetical $10,000 investment in the S&P 500 index between 1 January 2003 and 30 December 2022.
Source: Visual Capitalist
As you can see, your original $10,000 investment would have been worth more than $60,000 if you’d remained invested through this period, despite significant downturns caused by the 2008 financial crisis and the Covid-19 pandemic along the way.
However, if you’d missed just the 10 best days in the market over that period, your returns would be at least $35,000 lower.
This exemplifies the benefits of taking a “buy-and-hold” strategy. By focusing on the long term, you’re more likely to tune out fear during periods of uncertainty, potentially giving your portfolio the best chance to weather the storm.
This long-term perspective allows you to benefit from the market’s overall growth, even if it experiences fluctuations along the way.
Professional guidance from a planner could help you focus on the long term
Periods of market uncertainty can be nerve-wracking. Though, as you’ve seen, acting on your emotions during these periods might not be the wisest course of action.
A financial planner can be an invaluable resource during times of volatility. Their experience dealing with market fluctuations could help you maintain a long-term view by establishing and focusing on your financial goals.
This focus on the bigger picture might help you avoid knee-jerk reactions based on short-term market movements.
What’s more, your planner could help you build a diversified portfolio. Distributing your wealth across various assets, sectors, and geographical areas could lessen the effects of a downturn on your portfolio.
Above all, having a trusted planner in your corner who understands the emotional aspects of investing can be incredibly beneficial. They can help you keep a level head and avoid making impulsive decisions based on fear or excitement regarding market fluctuations.
Get in touch
If you’d like to find out how a diversified portfolio, aligned with your long-term goals, could help you to weather market uncertainty, please get in touch.
Email theteam@fortitudefp.co.uk or call us on 01327 354321 to find out more.
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.