Time in the market, not timing the market
29th June 2020
Don’t get distracted from staying focused on your investment goals Investment market swings can be unnerving, but they shouldn’t distract you from staying focused on your financial goals. Periods of market volatility, like whose we’ve seen over recent months, will undoubtedly be unsettling times for most investors. The risks of incurring losses can make holding investments difficult to bear, with the temptation being to sell out and cut your losses. But volatility is part and parcel of investing.
Day-to-day ups and downs of the markets Rather than focus on the day-to-day ups and downs of the markets, it’s far more important to focus on the things you can control. With global markets in the grip of the COVID-19 pandemic, investors have been faced with an impossible dilemma: whether to stay invested or to withdraw to a safe haven. It’s important to remember what really matters: it is ‘time in the market, not timing the market’ that dictates long-term returns. So rather than asking ‘Should I remain invested and continue to invest regularly?’, it’s worth inverting the question and asking ‘What’s the alternative?’ The alternative is to sell when you believe the market is at its high, and then buy back in when you think the market is at a low. So you have to get not just one, but two major decisions right. Profound pessimism to blithe optimism Not only that, but you have to do it at a time when emotions are running high, and the media and analysts are expressing views ranging from profound pessimism to blithe optimism, all of them equally convincing. The reality is that no one knows if we’ve already seen the bottom of the market, or if there is further volatility to come. On the one hand, it’s perfectly possible that we’ve seen the bottom. Markets look to the future rather than to the present. Weaker and more drawn-out recovery But on the other hand, there are many unknown factors: perhaps it will take longer to escape lockdown than investors currently hope, or perhaps there will be further waves of the virus that will result in any recovery being weaker and more drawn out than expected. If you are still tempted by the idea of trying to time the market, bear in mind that even professional fund managers who are studying the market on a daily basis can struggle to beat the market on a consistent basis. Even stronger growth in the future Sudden market moves can be testing times for all investors because we get a stark reminder of what investment risk really feels like. Short-term volatility, while unpleasant, should not detract your focus from your long-term investment objectives. Market corrections can be healthy and result in even stronger growth in the future, although this is not guaranteed and you could get back less than you invest. This is why holding a well-diversified portfolio of collective investments for the long term, such as Individual Savings Accounts (ISAs), unit trusts and investment trusts, as well as having a strategy you are happy with, is critical. Putting money to work as soon as possible COVID-19 is unlike any crisis we’ve faced in living memory. As well as the terrible cost in lives, the measures taken to combat the spread of the virus mean that the global economy is facing an even more extreme downturn than that seen in 2008. One of the fundamental principles of investing is to put your money to work as soon as possible. An investment needs time to grow, so the longer your money is in the market, the more chance you have of reaching your goals. Having a well-defined vision of your goals This is sometimes known as ‘pound-cost averaging,’ and it’s a way to sidestep your own behavioural biases and ride out market volatility without having to pore over the financial pages every day. By ignoring short-term noise, you give yourself a better chance of meeting long-term financial goals. The COVID-19 outbreak has sent markets into a chaos not seen since the last financial crisis. For many investors, like people saving for retirement, big market corrections will be worrying. For millennials, especially, this may be the first time they’ve experienced the bottom fall out of the market. When times are stressful and uncertain, it’s natural for investors to worry, often excessively, about what will happen in the short term, rather than focusing on longer-term opportunities. INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.