When it comes to investing, you may have heard the saying ‘buy low, sell high’. Whilst it might sound like an excellent strategy to get the most out of your money, it’s not as simple as timing investments. In fact, trying to do so could have a negative impact.
Investment markets are influenced by numerous factors. Taking all these into account to make investment decisions is challenging. When you look at past market fluctuations and missed opportunities with the benefit of hindsight, it’s easy to say: “All the signs were there”. But, in the moment, this is rarely the case and it’s far easier to make a mistake that you’ll regret in the future.
It’s near impossible to consistently time the market. Even seasoned fund managers, with teams and resources to research and support decisions, get it wrong at times.
Timing investments: The impact of getting it wrong
All investments come with some level of risk. However, research from Schroders has highlighted the risk of getting it wrong when you try to time investment markets.
If you’d invested just £1,000 in the FTSE 250 at the beginning of 1989, and left it there for 30 years, it might have been worth £26,831. That’s growth that would have helped your savings far outpace inflation and build up a nest egg. But if you’d attempted timing investments and consequently missed the ‘best days’ your investment could be worth far less after three decades:
- Remaining invested throughout the whole 30 years would have delivered 11.6% returns
- Missing the ten best days would have resulted in returns of 9.6%
- Missing the best 30 days would result in returns of 7%
At first glance, a 2% difference doesn’t seem like much. However, when you look at the bigger picture and take into account the impact of compounding, the effect can be significant. Missing the ten best days alone could mean you lost £11,000, whilst missing the best 30 days could have cost you more than £19,000.
Of course, during the 30-year period, investment markets experience volatility. At times, the value of investments will have fallen, and it can be incredibly tempting to sell at these points even when you’re investing with clear, long-term goals in mind.
Nick Kirrage, a fund manager on the Schroders value investing team, said: “You would have been a pretty unlucky investor to have missed the 30 best days in 30 years of investing, but the figures make a point: trying to time the market can be very, very costly.
“As investors, we are often too emotional about the decisions we make: when markets dive, too many investors panic and sell; when shares have a good spell, too many investors go on a buying spree.”
Letting emotions impact investment decisions
We know that logic and facts should be the basis of investment decisions. But like all financial planning decisions, emotions and experiences can drive decisions that may not be right for you. When it comes to investing, this may mean straying for your long-term plan.
There are many psychological traps that investors can fall for, including these three:
- Disposition effect bias: This refers to a tendency to label investments as ‘winners’ or ‘losers’. It can drive you to sell off investment sooner than you intended because they’re viewed as ‘winners’ or alternatively sell earlier than your initial plan.
- Self-attribution bias: Investors who suffer from self-attribution bias will attribute successful outcomes to their own action, whilst blaming negative results on external factors. It can lead to you making rash decisions due to overconfidence.
- Trend-chasing bias: This type of bias refers to the belief that historical returns predict future performance. However, this isn’t the case and can lead to you making investment decisions based on information that is no longer relevant or applicable to you.
Kirrage adds: “At times over the last three decades you would have to have had nerves of steel as an investor. They have included some monumental crashes including Black Monday in 1987, the bursting of the dotcom bubble at the turn of the millennium and the financial crisis, to name but three.
“The irony is that historically many of the stock market’s best periods have tended to follow some of the worst days.”
‘Time in the market is better than timing the market’
So, if timing investments isn’t a suitable strategy for the average investor, what is? For many, the saying ‘time in the market is better than timing the market’ rings true.
Whilst investment volatility can be nerve-wracking when values fall, a ‘buy and hold’ investment strategy is often more appropriate. Building a diversified investment portfolio that considers your risk profile and holding these investments long term can deliver returns that are more reliable than trying to time investment decisions.
Historically, investment markets have delivered returns when taking a long-term view. Sticking to your long-term investment plan, even as the market dips, can be difficult but, for most investors, it’s a strategy that delivers. As volatility is to be expected, you shouldn’t invest with short-term goals in mind. Ideally, you should intend to invest for at least five years. This gives the volatility experienced an opportunity to smooth out.
Please get in touch if you’d like to discuss your investment strategy and how it fits into your long-term plans.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.