It’s not timing the market – It’s time ‘in’ the market
By Craig Welsh
This article is published on: 5th June 2008
Global stock-markets are currently extremely volatile. Craig Welsh tells you what you can do if you have savings or investments?
The volatility seen in recent months in global stock-markets has prompted many headlines. The credit problems emanating from the US housing market slump, and recessionary fears, have had an impact on the value of shares on all market indices. So if you have savings or investments, it is only natural to have some concerns – so what do you do?
Well, every market cycle can experience periods of volatility, with both up and down days. Often, a few very good days account for a large part of the total return. Staying the course ensures that investments will be ‘in’ the market on the good days. It can be tempting to try to time market movements by selling stocks / funds when you think the market is about to decline and by buying stocks / funds when it appears the market is about to rise.
Resist being a market timer! Very, very few people, including many professionals, are successful. By trying to time the market, you will potentially (and most probably will) miss out on market rallies that could substantially improve your overall return and long-term wealth. What is most important is not timing the market, but rather time IN the market. Staying the course can prove very rewarding in the long run. Consistently predicting which days will move in which direction, though, is virtually impossible and can ultimately be very costly.
Missing only a few of the best days over the last few years would have had an adverse effect on total return. For example; a hypothetical USD 10,000 initial investment in the S&P 500 Index held over the entire period of 1 January 1997 through 31 December 2006 would have grown to USD 22,446. Missing just the five best days would have reduced the ending value to USD 17,357.
To put it another way, from 1992-2007 the UK FTSE All-share returned an average annual return of 9.84 percent. Had you missed only the best 10 days of market rallies, your annual return would have been 6.89 percent, or only 2.78 percent had you not been invested in the best 30 days over the period. (Source: Fidelity International)
So resist trying to time the markets. Set clear objectives, be mindful of how long you want to invest for and ensure you have a well-diversified portfolio. Understand exactly the risk involved, and, very importantly – have regular reviews.
Is now a good time to start investing?
Many people do see opportunities when markets are more volatile, and like in any line of business, buying low and selling higher is fundamental to success. However it really depends on your own circumstances.
- Establish what your financial planning needs are and set some objectives. Where are you now and where would you like to be in the future? Are there other areas which require attention first? Investment is about making your money work harder for you, so think about what sort of returns you are expecting.
- Be clear about your time horizon. For example when do you plan to use the money? If you have a medium – long-term view (5 – 10 years) then it really does make sense to consider investing.
- Be clear about your attitude to risk. The relationship between risk and reward means that greater long-term returns are often delivered through investments that involve a higher degree of short-term risk. Hence the length of time you have is crucial.
For expats, or people in the international community, managing finances can be difficult and time-consuming. Add to that the various tax, pension and currency implications of moving countries and it can become a real headache.
Proper planning is vital and on-going assistance and advice from a properly licensed adviser, with particular focus on expatriates, can prove invaluable.
Please note that past performance is no guide to future performance and that you should take professional independent advice before investing.