Stocks

Why is time in the market your friend?

20 Jan 2017

Ben Kumar, Investment Manager

Seven Investment Management (7IM) has always intentionally targeted medium to long term investors. Our view is that investors who remain fully invested over time are rewarded for their patience - while those ‘investors’ who buy and sell when the market rises or falls are often punished. Trying to time when to buy and sell the market is tough to do once or twice in a lifetime, even for those whose job it is to watch them. Making it a key feature of your approach to investing your savings is even more difficult – and more often than not results in losses for a variety of reasons.

There are so many reasons that timing the market is difficult. For most of us, practicality is up there – life intervenes. We don't watch the market every minute of every day and so can miss the optimal time to buy or sell. Emotions also come into play. Losing money hurts! If you've lost money once in a market, a natural human instinct is to be cautious of doing the same thing again. Waiting to be sure of a rally before reinvesting can mean buying back in too late and so missing the upside you were trying to get! This is shown by this graph:
Why time in the market is your friend Graph 1
                                                                                                                                                                                                Source: Financial Express

Here, our example investor was invested in the 7IM Balanced Fund as shown by the green line. The red line shows what would happen if you sold into cash in October 2008 as markets fell and then didn’t re-enter the market until March 2010 – perhaps when you thought that the rally was confirmed – rebuying the same 7IM Balanced Fund. The result however is that staying invested (the green line) the investment returned 56.66%, while trying to time (the red line) it returned just 40.55%. On a £50,000 portfolio, while past performance is no indication of future returns, that’s a potential difference of £8,005.

But how is time in the market your friend? Below we highlight the annual returns of the FTSE 100, had you missed a certain number of the best days in the market.
Why time in the market is your friend Graph 2
                                                                                                                                                                                                          Source: 7IM

While most recognise that spotting these best days in advance is impossible, argument is often made that when markets start declining, you should disinvest, lock in profits and avoid some of the losses. The logic seems compelling! Look what happens below if you miss the worst days – even just missing the worst five days increases your return by 2% a year.
Why time in the market is your friend Graph 3
                                                                                                                                                                                                                 Source: 7IM

The issue here is that most of the best days occurred within a week or so of the worst days. Imagine if you sold and missed the worst day, but then failed to buy back in and missed the best day. Back to square one perhaps, or worse. By trying to time the market, you could be more likely to miss the boat. Whatever the case, you definitely don’t have a crystal ball telling you which days to miss and which to be invested.

Add in to all of this theory the practical cost of trading. While 7IM doesn’t levy dealing charges, most firms do and so you could up with quite a bill to deduct from any returns.

Last, but not least, we have not even mentioned the positive effect that dividends have on your portfolio. We’ve stretched the timeline here (to 67 years) to exaggerate the effects, but the message is clear: reinvesting the dividends you receive has an incredibly powerful effect on returns. Without compounding, investing £100 over the period offers returns of £8,0011. With compounding, the return could be £147,384. So stay invested and then keep reinvesting!

We all know that investments go down as well as up and that the value of your investments may end up less than the amount you originally invested. However, we are much more broadly diversified in terms of assets – we typically invest in around 30 different types of assets – effectively meaning you see a chart line showing returns that is not quite so jagged. We also will invest in assets that aim to hedge against the various market declines.

This is not only to help encourage you to remain invested, but to also persuade you to invest and take advantage of our more predictable investment approach so there’s a reasonable chance of meeting your desired outcome.

Ben Kumar
Investment Manager 

1 Source: Bloomberg

Before you go

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Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.

 





The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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