Buying low and selling high is every investor’s goal. However, timing the market precisely is notoriously difficult, if not impossible.
Research undertaken by Schroders shows how costly it can be when the timing is wrong.
Over three decades, mistimed decisions on an investment of £1,000 could have cost you nearly £18,000-worth of returns.
If in 1987 you had invested £1,000 in the FTSE 250 and left the investment alone for the next 30 years it would now be worth £24,686. (Bear in mind, of course, that past performance is no guarantee of future returns).
However, if you had tried to time your entry in and out of the market during that period and missed out on the index’s 30 best days the same investment would now be worth £6,878, or £17,808 less.
In terms of annualised returns, over the last 30 years you would have made:
- 11.3 per cent if you stayed invested the whole time
- 9.3 per cent if you missed the 10 best days
- 7.9 per cent if you missed the 20 best days
- 6.6 per cent if you missed the 30 best days
The 2 per cent difference to annual returns between being invested the whole time and missing the 10 best days doesn’t seem much but the effect builds up over time, as shown in the table below.
UK stock investment returns since 1987
|Index||Return on £1,000 over 30 years||Less the best 10 days||Less the best 20 days||Less the best 30 days|
|FTSE All share||£13,320||£7,124||£4,637||£3,168|
When observing returns over long periods, investors should also bear in mind that markets can be volatile, with many ups and downs during the timespan.
Nick Kirrage, an equity value fund manager and a blogger on The Value Perspective, said: “You would have been a pretty unlucky investor to have missed the 30 best days in 30 years of investing, but the figures make a point. The point is that timing the market can be very, very costly.
“Investors are often too emotional about the decisions they make: when markets dive, too many investors panic and sell; when shares have had a good spell, too many investors go on a buying spree.
“The irony is that historically many of the stock market’s best periods have tended to follow some of the worst days, as shown in previous Schroders research.
“It’s important to have a plan of how long you plan to stay invested, with that plan matching the goals of what you’re trying to achieve, be it money for retirement or your children’s university education. Then it's just a matter of sticking to it – don't let unchecked emotions derail your plans.”
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