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Time not timing – investing for the long term

By Michael Doyle - Topics: France, Investment Risk, Investments, Luxembourg
This article is published on: 8th March 2021

We often get asked the question, “When is the best time to invest my money?” Our answer is never based around when you should invest, but rather how long you can invest for.

• No one can predict the top or bottom of any market.
• The market has always exceeded its previous high when it has recovered.

So the question is not when you should invest your money in the market, but how long can you stay in the market to achieve your financial goals? Or to put it more simply, time is more important than timing.

During periods of stockmarket volatility, investors often become uncertain and lose sight of their initial long-term investment view. They often find themselves postponing a new investment, or even selling their current holdings with a view to re-invest when the markets stabilise.

What often happens in times of trouble, however, is that investors sell at a lower price than that which they bought at.

A study by Dalbar in Boston USA, highlighted a key area for private investor’s underperformance:

• According to Dalbar, from 1985 to 2004 the average personal investor achieved an annualised return of just 3.7% while the S&P500 returned 11.9% and inflation averaged 3%

A further study showed that playing the waiting game could cost you dearly. Investors who remained fully invested in the UK market over the period March 2003 until March 2008 would have received returns in excess of 60%. However, those investors who tried to time the markets would have had their returns cut to 40% if they missed out on the best 10 days of the market and those who missed out on the best 40 days would have seen returns of 4%!

This applies across other major markets as the table below shows:

MARKET INDEX FULLY INVESTED MISSING BEST 10 DAYS MISSING BEST 40 DAYS
UK FTS All Share 63.4% 40.0% 3.9%
US S&P 500 56.4% 11.6% -39.2%
GLOBAL MSCI World 63.7% 21.6% -26.2%

Sources: JP Morgan Asset Management/Bloomberg/Datastream

What we do know is that historically the markets have always recovered, as the table below shows.

EVENT DATE RESPONSE AFTER 4 MONTHS
Pearl Harbour* December 1941 -6.5% -9.6%
Korean War June 1950 -12% +19.2%
JFK Assassination November 1963 -2.9% +15.1%
Arab Oil embargo October 1973 -17.9% +7.2%
USSR in Afghanistan December 1979 -2.2% +6.8%
1987 Financial Panic October 1987 -34.2% +15%
Gulf War December 1990 -4.3% +18.7%
ERM Currency Crisis September 1992 -6% +9.2%
Far East Contagion October 1997 -12.4% +25%
Russia Devalues Rouble / Long Term Capital Management Crisis  

August 1998

 

-11.3%

 

+33.7%

 

World Trade Centre September 2001 Dow        -14.3%

Nasdaq  -11.6%

+5.9%

+22.5%

*(The markets rose 8% during the year following Pearl Harbour)

upward stockmarket trends

Essentially what we can conclude is that most investors do not buy and hold for extended periods of time. Thus getting in and out of the market at the wrong times or switching funds with a view to chasing the top performers, unfortunately at a time when these ‘top performers’ have reached their peak.

Almost without exception, successful investment strategies rely on discipline, patience and taking a long-term view. Successful investors typically neither react to short market events, nor try to pre-empt short term market direction.

For advice on an investment solution aligned with your personal objectives and risk profile, feel free to contact me for an initial discussion.

Article by Michael Doyle

If you are based in France or Luxembourg you can contact Michael at: michael.doyle@spectrum-ifa.com for more information. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.

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