The age-old question… time in the market or timing the market?
When it comes to investing, most people assume they have to invest at the correct time or take what they have when they feel like their investment has made a good profit. However, when it comes to investing for the medium to long term (5 + years), ‘hindsight’ is often both your best friend and worst enemy.
One of the main problems when stock markets become volatile is investors start to panic and make decisions they later regret – sometimes doing nothing is the best thing you can do.
At YorWealth we truly believe that ‘time in’ the market beats ‘timing’ the market. It is easy to miss the best gains in the market and so it is important to remain invested and allow your investments the time they need.
By missing out on a very small number of days with strong returns an investor can ruin their prospects for longer-term returns. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility just like the current pandemic we find ourselves in.
For example, if you were invested in the US equity market1 from the end of 1999 to the end of 2019 and missed out on just the top ten days in those 20 years, your annualised return would drop from 7.1% to 3.5%. By missing out on just 30 days your annualised return will be negative.
This is particularly significant for investors who become nervous and panic because the days on which markets register their strongest gains are often following a major sell-off. Investors who sell in response to volatility are locking in losses and potentially excluding themselves from the gains that subsequently follow.
The risk of inflation
Inflation is another, often overlooked risk of keeping your money out of the stock market. Its power can be seen in the steady increase in the price of goods – from a first class stamp to a one-bedroom flat.
With interest rates being at an all-time low, keeping your money in cash won’t keep pace with inflation. Your account balance won’t decrease, but you’ll actually be losing money in ‘real’ terms (in other words, you’ll be losing spending power). Conversely, investing has the potential to outpace inflation and give you a ‘real’ return over the long term.
The power of compounding
One of the reasons that long-term investing has the potential to deliver such great returns is the power of compounding. Einstein allegedly called compounding the eighth wonder of the world. It describes the snowballing effect of your investment gains generating further returns over time.
It is mainly seen through the reinvestment of dividend payments into more shares to subsequently receive more dividend payments and buy even more shares. However, you can also see its effect when companies reinvest their profits in advertising, more staff or better services and subsequently see their profits increase.
At YorWealth, even with the leading market research available to us, sadly we do not have a DeLorean to jump ahead in time to know exactly what the future holds. We firmly believe that solid investment choices along with time spent in the market, working in tandem with a well constructed financial plan will help you to achieve your goals.