It’s time in the markets, not timing the markets that matter

Posted by Adrian Lowcock in Latest insights category on 07 May 20

On paper, trying to time markets makes perfect sense. If you can sell high and buy your investments back at a lower price then you would boost your investment returns. This is what sayings such as “Sell in May” suggest is possible. However, whilst this may be theoretically possible, putting it into practice is notoriously difficult.

Timing the market requires an investor to get two decisions right. First, they would have to be able to sell near to the peak to avoid missing out on further gains and to avoid subsequent falls in the stock market.

Secondly, they would need to repeat the feat when markets had fallen. Whilst they don’t necessarily need to buy at the bottom, an investor would need the confidence to buy when others were selling. Therefore, during March, as coronavirus spread around Europe, you would need to have had the courage and conviction to invest.

Things often seem clearer with hindsight but it is very hard to time markets in practice and any mistakes could mean you miss out on a market rally.

Time in the market matters

We looked at the total return of the MSCI World over 10 years on a rolling monthly basis from 31st December 1989 through to last month*. This showed that there were just 12 occasions when the index fell, out of a possible 245. This means that the index delivered a positive return 95% of the time, excluding charges.  

Not only did the index deliver a positive return 95% of the time but the analysis also showed the average annual return of the MSCI World was 10.61%*. Of course, investors are likely to have seen different returns due to fees, and depending on the types of investments they held, but historic evidence suggests that investing for the long term has worked.

Making decisions in uncertain times

Coronavirus has created a lot of uncertainty with many companies unwilling or unable to make profit forecasts for the rest of the year. If management cannot predict the short-term outlook for their business, it is likely to be even harder for others to do so with any accuracy. Likewise, economic forecasts are hard to make when large parts of an economy are shut down and there is no clear idea of when or how businesses will re-open.

However, if you take a longer-term perspective you can build up a better picture. You can analyse companies and determine whether they can survive in the short term and get an idea of their longer-term prospects. By doing that you can put a value on the company based on its long-term outlook.

Focusing on the long term also means you can align your interests with the companies you invest in. Owning shares means you own a stake in all future profits and growth of the business and not just during the next six months. Likewise, looking at investments long term should align your investment decisions with your personal objectives and help you to achieve them.

Three tips for successful long term investing

Stay calm: Only make investment decisions when you are calm and rational. Mistakes are often made in the heat of the moment when our tolerance for risk is low.

Remember your goals: Remind yourself what you are investing for, whether it is retirement or a dream holiday. When will you need the money? Will it be in the next couple of years, or not for the next few decades?

Become a contrarian: Be greedy when others are fearful. When everyone is selling, think about using your annual ISA or SIPP allowance, buying funds that you want to hold for the long term.

For long term investment ideas check out our Focus 50 list of favoured funds.

*Source: FE Analytics Total Return in pounds sterling.  Monthly rolling 10 years from 31st December 1989 to 30th April 2020.