“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch, US Mutual Fund Manager

During periods of heightened financial market volatility, and increased levels of uncertainty, it can be tempting to try and time the market by selling assets and then buying them back at a later stage.

This strategy sounds appealing, when we consider the high interest rates that are currently available on deposit accounts. Care should be taken when using cash as part of a longer-term investment strategy because it is very likely to lose value when inflation is taken into account.

However, timing the market is virtually impossible, even for the most experienced investors. This is why it’s often said that time in the market is more important than timing the market.

Emotions and investing

Human nature can lead investors to be emotional about financial decisions. When markets dive, too many investors panic and sell; when stocks have had a good spell, too many investors go on a buying spree.

Past experience can lead to panic selling

People tend to ‘panic sell’ based on their past experiences. There have been six major crashes in the past 30 years, so psychology plays its part.

 

 

 

 

 

It is never an easy ride on the way up in a bull market. Investors seem perpetually concerned, worried about the valuation levels, forever peering around the next corner and watching for the canaries in the coal mine that might signal the onset of the next market downturn.

This is why many investors panic sell when the going gets tough, and why we recommend that you should try not to look at the value of your investments too often, regardless of whether the value is rising or falling!

The issue with trying to time your exit and re-entry.

The pace at which markets react to news means stock prices have already absorbed the impact of new developments and when markets turn, they turn quickly. Those trying to time their exit and re-entry will usually miss the market bounce. Attempting to predict the future, may mean you could end up being out of the market when it unexpectedly surges upward, potentially missing some of the best performing days. Missing one or two big days, compounded over time, can greatly impact your portfolio.

The graph below illustrates how a hypothetical $100,000 investment in the S&P 500 Index would have been affected by missing the market’s top performing days over the 20-year period to the end of 2021. An individual who remained invested for the entire period would have seen their investment grow to $616,317, while an investor who missed just ten of the top performing days during that period would have accumulated less than half of that value.

It’s important to note, most of the best days happen shortly after the worst days. Over the last 20 years, 70% of the best 10 days happened within two weeks of the worst 10 days. If you were to go in and out of the market as conditions changed, there is a high chance that you would miss out on the days of high growth.

We must remember that short-term volatility is the price you must pay for the chance of higher long-term returns. The best strategy for long term investors is to remain in the markets and let the power of compounding take effect, rather than crystallising short-term losses.

I continue to believe that our diversified investment portfolios are well positioned to deliver returns in excess of both inflation and savings deposit rates over the medium to long term.

However, as always, short term market movements are almost impossible to predict. Therefore, investors who require capital withdrawals from their portfolios in the shorter term should contact their adviser who can help devise a suitable plan of action.

Philip Bailey

29/09/2023