“Buy low, sell high” – that’s every investor’s goal. However, it’s easier said than done. Especially if you’re trying to time the market, which is notoriously difficult, if not impossible.
It can also be costly. Our research shows just how costly it can be when you get the timing wrong.
Time in the market - not timing the marketOver three decades, mistimed decisions on an investment of just £1,000 could have cost you more than £19,000-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 1989 you had invested £1,000 in the FTSE 250 and left the investment alone for the next 30 years, it might have been worth £26,831 by the end of 2019. (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 index’s 30 best days the same investment might now be worth £7,543, or £19,288 less, not adjusted for the effect of charges or inflation.
Over the last 30 years you could have made:
- 11.6% per year if you stayed invested the whole time
- 9.6% per year if you missed the 10 best days
- 8.2% per year if you missed the 20 best days
- 7.0% per year if you missed the 30 best days
The 2% 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 £11,000 during that time.
Staying invested the whole time vs timing the market
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 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 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."
Speak to a financial adviser if you are unsure as to the suitability of your investment.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders 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 Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. 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.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.