The £33k cost of trying to time the market

When markets fall, the natural instinct is to sell. Our research highlights how costly it can be to miss the stock market’s best days.

15/06/2021
market-analysis-tablet

“Buy low, sell high” – that’s every investor’s goal. However, it’s easier said than done.

In practice timing the market is notoriously difficult. It can also be costly. Our research highlights potential losses if your attempts to time market highs and lows go wrong.

The dramatic drop in share prices at the onset of the pandemic in 2020 – and the strong recovery since – is just one example in recent decades of hard-to-predict stock market volatility.

Time in the market - not timing the market

Over 35 years, mistimed decisions on an investment of just £1,000 could have cost you almost £33,000-worth of returns.

Our research examined the performance of three indices that reflect the performance of the UK stock market – the FTSE 100, the FTSE 250 and the FTSE All-Share.

If at the beginning of 1986 you had invested £1,000 in the FTSE 250 and left the investment alone for the next 35 years, it might have been worth £43,595 by January 2021 (bear in mind, of course, that past performance is no guarantee of future returns).

However, the outcome would have been very different if you had tried to time your entry in and out of the market.

During the same period, if you missed out on the FTSE 250 index’s 30 best days the same investment might now be worth £10,627, or £32,968 less, not adjusted for the effect of charges or inflation.

Over the last 35 years your original £1,000 investment in the FTSE 250 could have made:

-        11.4% per year if you stayed invested the whole time

-        9.5% per year if you missed the 10 best days

-        8.1% per year if you missed the 20 best days

-        7% per year if you missed the 30 best days

The 1.9% difference to annual returns between being invested the whole time and missing the 10 best days doesn’t seem much. But the compounding effect builds up over time, as shown in the table below. If you had invested in the FTSE 250 it could have cost you more than £19,000 during that time.

Staying invested the whole time vs timing the market

timeinmkt-(002)

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

When observing returns over long periods, investors should also bear in mind that markets can be volatile, with many fluctuations up and down during the timespan.

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 35 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 had a good spell, too many investors go on a buying spree.

“At times over the last three decades you would have to have had nerves of steel as an investor.

“They have included some monumental stock market crashes including Black Monday in 1987, the bursting of the dotcom bubble at the turn of millennium and the financial crisis in 2008, 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.

“It’s important to have a plan of how long you plan to stay invested, with that plan matching the goals of what you’re trying to achieve, be it money for retirement or your children’s university education. Then it's just a matter of sticking to it - don't let unchecked emotions derail your plans."

Always speak to a financial adviser if you are unsure as to the suitability of your investment.

Important information:

This document is marketing material. This document is provided by the author and may not necessarily represent views expressed in other Aspect8 communications, strategies or funds. 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. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. The sectors, securities, regions and countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Aspect8 does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Aspect8 has to its customers under any regulatory system. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. This content is issued by Aspect8 Limited, Holmwood House, Broadlands Business Campus, Langhurstwood Road, Horsham, West Sussex, RH12 4QP. Registered No. 07572431. Authorised and regulated by the Financial Conduct Authority, FCA no. 227247.

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