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Why market timing is a fallacy and it’s time in the market that counts

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There’s a lot for investors to worry about.

High market valuations, rising interest rates, the prospect of a no-deal Brexit and escalating trade tensions fuelled by Donald Trump all raise the likelihood of greater market volatility.

When markets do become more volatile, with investor sentiment turning negative and resulting in short-term falls in value, it can be tempting to try and time the markets.

Timing the markets involves attempting to sell before the equity markets hit the bottom, and then buy again before they start to rise.

It sounds good in theory. In practice, it doesn’t usually work out that way. Instead, you could find yourself selling low and buying high.

Repeat that process enough times and you will soon run out of money to invest. At the very least, the value of your investment portfolio will take a big hit.

One of the biggest problems with attempting to time the market is that you can easily miss out on a few of the best days of returns. Do this, and your overall long-term returns will be significantly worse.

According to a study from Fidelity International a couple of years ago, an investor who invested £1,000 in the FTSE All Share index 30 years ago but missed the best 10 days in the market since then would have achieved an annualised return of 7.09% and ended up with a total investment of £7,811.55.

That compares with an annualised return of 9.38% and investments worth £14,733.64 if they had stayed in the market the whole time – an opportunity loss of £6,922.09.

If the investor had missed the best 20 days, their annualised return would be 5.55%, which would have resulted in an even worse shortfall of £9,676.56.

This research reminds us that volatility is the price you pay for long-term outperformance from equities, relative to other investment asset classes. The potential for long-term returns comes from risk in the form of market volatility.

There are significant risks associated with trying to time the markets. This is because it is so difficult to predict the best time to get out and then get back in during periods of market volatility.

These risks are magnified by the impact of the very best and worst days of market performance tending to be grouped together during periods of increased volatility.

A more sensible approach to investing is to keep your money exposed to the markets throughout the entire market cycle, during the ups and the downs. There’s an old stock market adage which says time in the market matters more than timing the market. We would tend to agree.

One area of value we add is behavioural coaching. When markets are especially volatile, we are there to guide you and keep you focused on your long-term investing objectives. Because we know and can demonstrate the value of time in the market, and the futility of market timing, we are able to secure the best long-term results for our clients.

Our message remains unchanged: When the press and TV news shout about investment markets falling, find something else to do and ignore them.

Dave and the team at Gibson Lamb