“Buy low, sell high” – that’s every investor’s goal. However, it’s easier said than done.
In practice timing the market is notoriously difficult. It can also be costly. Our research highlights potential losses if your attempts to time market highs and lows go wrong.
The dramatic drop in share prices at the onset of the pandemic in 2020 – and the strong recovery since – is just one example in recent decades of hard-to-predict stock market volatility.
Time in the market – not timing the market
Over 35 years, mistimed decisions on an investment of just £1,000 could have cost you almost £33,000-worth of returns.
Our research examined the performance of three indices that reflect the performance of the UK stock market – the FTSE 100, the FTSE 250 and the FTSE All-Share.
If at the beginning of 1986 you had invested £1,000 in the FTSE 250 and left the investment alone for the next 35 years, it might have been worth £43,595 by January 2021 (bear in mind, of course, that past performance is no guarantee of future returns).
However, the outcome would have been very different if you had tried to time your entry in and out of the market.
During the same period, if you missed out on the FTSE250 index’s 30 best days the same investment might now be worth £10,627, or £32,968 less, not adjusted for the effect of charges or inflation.
Over the last 35 years your original £1,000 investment in the FTSE 250 could have made:
- 11.4% per year if you stayed invested the whole time
- 9.5% per year if you missed the 10 best days
- 8.1% per year if you missed the 20 best days
- 7% per year if you missed the 30 best days
The 1.9% difference to annual returns between being invested the whole time and missing the 10 best days doesn’t seem much. But the compounding effect builds up over time, as shown in the table below. If you had invested in the FTSE 250 it could have cost you more than £19,000 during that time.
Staying invested the whole time vs timing the market
Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
Discover more from Schroders:
– Learn: Johanna Kyrklund: Time to slow down (but not too much)
– Read: The equity sectors best at combating higher inflation
When observing returns over long periods, investors should also bear in mind that markets can be volatile, with many fluctuations up and down during the timespan.
Nick Kirrage, a fund manager on the Schroders value investing team, said: “You would have been a pretty unlucky investor to have missed the 30 best days in 35 years of investing, but the figures make a point: trying to time the market can be very, very costly.
“As investors we are often too emotional about the decisions we 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.
“At times over the last three decades you would have to have had nerves of steel as an investor.
“They have included some monumental stock market crashes including Black Monday in 1987, the bursting of the dotcom bubble at the turn of millennium and the financial crisis in 2008, to name but three.
“The irony is that historically many of the stock market’s best periods have tended to follow some of the worst days.
“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.”
Speak to a financial adviser if you are unsure as to the suitability of your investment.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.