‘Time in the Market’ or ‘Timing the Market’?

With over 90 years of combined experience of financial planning & investing, we consider that it is very difficult and most likely impossible to predict when is the best time to enter or exit the market. The speed at which markets react to news means stock prices have already absorbed the impact of new developments. Those trying to time their entry and exit into markets may actually miss the bounce. Missing out on just the 10 best days in the market since 2002 will have left your investments in negative territory.

When in the midst of the market noise, logic and common sense are hard to find. History and statistics show us that the most important part of investing is to be invested. This requires patience and it is often difficult to retain one’s patience in the midst of such turmoil.

Statistics tell the story for themselves. For example, if we look at the S&P 500 over the period from the start of 1995 to the end of 2014, we then have a period of investing covering some 5,036 trading days. During that time if I had invested $10,000 from the start I would have had an annualised return of 9.85% providing me with a perfectly healthy profit of $55,475.13. However, if I managed to miss just the best 5 days out of 5,036, my profit would reduce by 39.73% to just $33,435.75 – a difference of $22,039 for just 5 days!

If we expand the number of missed days to 40 we see the point exaggerated still further. In fact instead of just making less profit, I would actually make a loss and I wouldn’t get all of my original money back, just $9,143.46 or a loss of $856.54.

If we reverse the situation. Supposing I had managed to miss the worst days during that time, what would have happened to my $10,000? Well if I had missed the 5 worst days my annualised return would have leapt to 12.24% resulting in my $10,000 giving me a profit of $90,688. Then to balance out the figures, I should also show you the effect of missing the worst 40 days out of 5,036. In this case my annualised return would have risen to 22.19% and my profit would have risen to an astonishing $540,011.

However, of course we have no means of knowing when such days are ever going to be and thus unless you are willing to believe the market soothsayers, common sense would tell us that the old market rhyme is still correct –“it’s not timing the market, but it’s time in the market”.

So when you look at markets today, and after such a long period of recovery from the financial crisis, it would be very easy to convince yourself to sell out of fear, whereupon you would promptly find that you missed one of the key positive days that are so vital for longer term returns. Then of course you have the problem of trying to time the entrance back in again. So when is the best time to invest? Well probably now, or even in tranches of “now’ – but not later.

Implications for Investors?

Markets will remain volatile and investors should ensure that their investments remain suitable for their circumstances and hold enough cash for any rainy day needs. Those who are accumulating money could consider adding to portfolios when markets are lower. Those decumulating from their capital, for example when drawing an income, need to look carefully to guard against drawing down too much of their capital and eroding the underlying capital base. It is also essential to make use of tax allowances especially as these are constantly under review by the government. Experience tells us that our own human emotion is the biggest threat to our own portfolio. Investment decisions based upon emotion are nearly always wrong!

For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]

Important Information
Please note that the above article does not constitute financial advice. The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Loughtons Independent Financial Advisers does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Loughtons Independent Financial Advisers has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.

Loughtons Independent Financial Advisers is a trading name of JPRS (South West) Limited. JPRS (South West) Limited is authorised and regulated by the Financial Conduct Authority.