Why time in the market often beats timing the market
Volatility can be a major concern for investors, often amplified by media sensationalism. Headlines and stories projecting panic, focusing on negativity, and often lacking nuance or context, can be enough to make you wonder if you should just cash out.
However, the reality is that volatility is a normal part of market activity. Looking back over the past decade shows that Brexit, the pandemic, trade tariffs, and conflicts in the Middle East and Ukraine have all caused market fluctuations. But history tells us that these tend to smooth out over time.
Indeed, spending “time in the market”, even during periods of uncertainty, can often generate much better long-term growth than “timing the market” – attempting to invest and cash out at exactly the right moment.
Read on to learn why.
Timing the market can be a near-impossible task
Understandably, market dips can be uncomfortable for investors. Loss aversion is a key psychological factor driving decision-making and, according to Behavioural Economics, we feel the pain of losses twice as powerfully as the pleasure of gains.
So, if you find yourself baulking at the idea of staying in a rocky market, this is far from an irrational response. You may decide to cash out of the markets to avoid further losses and then invest again later.
However, trying to time the market is virtually impossible. To be successful, you’d need to know exactly when to sell and exactly when to buy back in. And to compound this, missing just a few of the market’s strongest recovery days can significantly reduce your opportunity for long-term growth.
As the best- and worst-performing days are often in close proximity to each other, this makes it even harder to plan your time in the market.
Market volatility can be an opportunity for regular investors
If you regularly contribute to your investments, market downturns could actually be seen as an opportunity. You can buy more units at lower prices, which, over time, reduces your average cost of investing. Again, this can be a far simpler approach than trying to time the market.
For example, if you invest a fixed amount each month, your money goes further when markets fall because asset prices are lower. A £500 monthly investment might buy 50 units at £10 each, but 62.5 units if prices fall to £8. As markets recover, those additional units also benefit from future growth.
History shows that markets usually recover from major shocks
Staying in the market may seem like a difficult decision if your investments are making losses. However, if you consider events just in your own lifetime which the markets have recovered from, this could give you more confidence.
The global financial crisis in 2008, impacts from Covid-19 in 2020, the more recent trade tariffs imposed by the US, and geopolitical conflicts have all shocked the markets. While they may not have bounced back instantly, history tells us that markets typically recover over the long term.
For example, according to Schroders, investors lost 80% of their money in the Great Depression of the 1930s. But if they remained invested, they would have made their money back in just over 15 years.
After the 2008 global financial crisis, investors recouped their losses in four to five years (if invested in the S&P 500 Index).
Cashing in could mean you miss out on growth opportunities or even suffer real losses
Cashing in investments could mean you miss out on long-term growth and, in some cases, see real losses.
This is because selling investments during a market downturn could lock in losses that might otherwise have recovered.
Plus, your wealth will be at the mercy of inflation once you’ve cashed in. As the cost of goods and services continues to rise, you could find your savings have much less purchasing power. Unless interest rates outweigh inflation, the real-world value of your money will drop.
In comparison, the long-term growth you may see from holding investments could be more likely to beat inflation.
Get in touch
Your investments are based around your goals, which are often long term. For example, you may be saving for retirement or hoping to leave a significant legacy to your loved ones. This makes short-term volatility less important, but it is still not to be ignored completely. A well-balanced and diversified portfolio of investments designed in line with your risk tolerance can help you navigate market volatility.
We’re always happy to discuss a bespoke approach to your long-term financial strategy. Please email enquiries@integritasfp.co.uk or call 01283 777014.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
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.
