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25 May 2022

Time in, Not Timing, the Market

Time in the market rather than timing the market. It’s an age-old saying within the investment community that has stood the test of time for decades. Essentially what it means is that attempting to time the market, that is to say waiting for an optimal entry point before investing, is often difficult and with a higher opportunity cost than simply investing for as long as possible.
 
This sentiment has been echoed by many great investors such as Warren Buffett and UK star fund manager Terry Smith, who have all preached long-term investing as the best and most sustainable strategy to seek returns in financial markets. History has shown this to be true with markets globally rebounding and pushing higher, even after the harshest shocks to the economy. While past performance is not an indicator of future returns, we can see that businesses globally have been able to innovate and grow following periods of significant share price declines.
 
The dotcom bubble, in which euphoria surrounding internet companies hit record levels, saw shares of fundamentally speculative businesses rocket during a relatively short period of time. When investors realised that the majority of such companies would not make it through the next few years, shares came crashing down, taking almost everything with them and causing significant market turmoil for just over two years. However, it is only those investors that sold during that time that would have lost any money, those that held on, for the most part and as long as they were holding the index or a basket of good quality assets, would have made their money back, with those continuing to purchase on a regular basis despite the negative news, significantly better off than they once were.



The global financial crisis was another example of a significant market crash, as the global financial system was thrown into disarray. Similarly to the dotcom bubble, markets dropped significantly, but rebounded a number of years later, with investors treated to over a decade of spectacular returns post- 2009.
 
The COVID-19 crisis is the most recent and potentially most widespread impact that markets have ever seen. However, after March 2020, equities, especially those in the technology sector, were treated to a year of impeccable returns as companies learned to deal with the virus and many sold products that helped businesses guide themselves through the new normal.
 
What these illustrate is that, even during the worst of times, businesses can recover eventually and find ways to adapt and thrive. If you’d have sold during the March 2020 COVID-19 market drop and not re-invested quickly, you would have missed out on double digit returns across the board, even as the virus continued to spread and mutate.
 
The impact of missing out on such returns is well documented. Analysis from UK-based asset manager Schroders shows that over the last 35 years, a constant investment in the UK’s second-tier index any sales would have delivered returns of 11.4% per year. However, if you’d have missed just the 10 best days during that period, your annual returns would have slipped to 9.5%, while missing the 30 best days would have plunged returns to just 7% per year. This may seem like a reasonably small percentage decline, the difference on a £1,000 investment in 1986 would have been nearly £33,000 between remaining fully invested and missing just the best 30 days during that period.
 
Our own in-house analysis further reiterates this point, with the table showing a clear relationship between time invested and the probability of avoiding loss. While we are all told ‘buy low, sell high’, the data in fact shows that remaining invested is the best strategy to create long-term value.
 
There are certainly more than a handful of trading strategies and styles available to budding investors. Growth and value investing, two investment styles that search for growing and undervalued stocks respectively, are often seen as the most popular approaches, with growth outperforming for the majority of the past decade and value re-emerging as the dominant style in recent years thanks to a bounce back in the economy, higher energy prices and interest rates. While many investors and fund managers profess to have either found the next best trading strategy or that their style of investing is somehow optimal, in many cases the best strategy is to simply either buy the index or a portfolio of good quality funds and never sell.



The recent stock market declines will likely reinforce this idea as, over time, large declines are more often than not simply good opportunities to remain buyers of fundamentally sound investments. Doing so will lower your cost of ownership, a process known as ‘pound cost averaging’ and ensure that your returns continue to compound over time.
 
If you take nothing else away from this piece, Terry Smith’s Tour de France analogy is worth noting. No one rider has ever won each individual stage of the race; instead the winning strategy is to consistently perform within the top quartile of riders and over time those consistent results will add up to a win. This theory copies across directly to investing. Rather than chasing the best strategy each year, it’s better to simply remain invested in a pool of good quality assets over a long period of time.
 
This article was taken from the February 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Time in, Not Timing, the Market
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