Time in the market, not timing the markets
With markets around the world continuing to prove unpredictable as momentous financial and political events continue to unfold, it’s perhaps not a surprise that some investors are increasingly concerned about when the ‘best time’ for them to invest might be. Many of these people will decide to hold off on making an investment, choosing to keep their money out of the markets in order to see what happens.
This might seem sensible, but if you find yourself in this position it’s worth taking time to really consider your best option. The first thing to do is to remind yourself why you’re investing in the first place. Any investment should be made with the goal of achieving something you want, such as providing for your retirement; however, it’s important to remember that returns don’t run like clockwork; volatility is normal and should be embraced!
Exhibit 1 shows calendar year returns for the US stock market, the world's biggest, since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.
Predicting short-term stock market movements is incredibly difficult, if not impossible. If it wasn’t, then every investor would be doing it and making their fortune easily. In order to counter any short-term shocks, one option is to make scheduled, monthly contributions to your investments if you’re using current income. This can position you over the long term whilst also helping to develop financial discipline. I recommend reading 'The Automatic Millionaire' by David Bach, it's a simple but powerful book.
Those looking to invest a lump sum can also use this technique, splitting it into several tranches and investing over a longer period of time to reduce exposure to short-term risks although there have been various studies which show very little benefit of this.
Other ways to help maximise your results include investing as soon as you can in order to benefit from compounding, using tax allowances such as ISAs to reduce the impact of tax on your returns, and reviewing your annual saving total and increasing it when you can. Staying disciplined in your investments is key, as missing just a handful of the best days on the market can have a major impact.
Exhibit 2 helps illustrate this point. It shows the annualised compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.
Wait. Go back and think about those figures above again. Amazing, right?
2018 has been a good year for investors so far, but it’s important to keep in mind that this could change just as easily as it could continue. As discussed already, volatility and temporary declines are normal when investing in the great companies of the world.
Enjoy the good times, but don’t focus on trying to predict exactly when things are going to change. If you’re planning to invest throughout your life, you can be certain that some years will be uncomfortable. Remember: long-term investors who keep to their plans are, more often than not, those who reap the greatest rewards.
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