With recent events, we would like to remind investors of the long-term benefits of remaining invested and that short-term market volatility is inevitable, particularly when there is uncertainty about how long the current health and economic emergency will last.
Investor behaviour is usually the main factor in market swings. As demand for investment rises, so do prices, and therefore values. Similarly, when investors are wary, prices can stagnate and drop, creating artificial losses. Of course, these losses can become very real if you choose the wrong moment to switch into cash.
In the current situation, investor sentiment is underpinned by real economic concerns. So, with this in mind, is there any value to making tactical trades in the hope of avoiding losses and benefiting from the eventual upswing?
Should I Try to Time the Market?
The problem with trying to time the market is that any information that is available to you, is also available to everyone else, including professional investors. Any position you could reasonably take with this knowledge is already priced into the market. With the exception of insider trading (which is illegal), the investors who have benefitted from market timing in the past have been extremely lucky and possess a strong appetite for risk.
Over a lifetime of investing, it is very rare to see a single investor or fund manager consistently beat the market.
How it Can Go Wrong
The risk with trying to time the market is that missing even a few days of growth can heavily impact on performance.
The chart below, from Fidelity1, illustrates how a portfolio of UK equities would have been affected over a period of 15 years, based on either remaining fully invested or missing some of the best days in the market.
Missing the 40 best days over 15 years means only missing out on two or three days’ growth, on average, each year. And the best days in the market tend to occur after negative periods, as things start to recover, but when most investors are still a little nervous. So, not only is timing the market likely to be futile, it can also be detrimental, as the chances of catching the best days (and missing the worst days) through judgement or skill are virtually non-existent.
Why Use an Investment Manager?
Since timing the market is not likely to provide better results, it is worth questioning the value added by fund managers and discretionary portfolio managers. Not all are created equal, and there are good reasons to outsource investment management to an expert. For example:
- Ensuring that the portfolio is well-diversified
- Maintaining the portfolio at a suitable level of risk
- Economies of scale
- Access to a wider variety of investment options
- Allowing an expert to take care of the research and day-to-day portfolio administration
However, if an investment manager charges high fees and bases their entire proposition on outperforming the market by making tactical moves, there is a good chance that the results will be disappointing.
Trust in the Market
When we talk about long-term investing, we are not referring to a few years, but to an investment plan that works for you throughout your lifetime. Many investors with a financial plan are aiming to invest for 30 years or more.
The past 30 years has given us substantial market turbulence, but also significant growth. The chart below shows the trajectory of Global Equities over the last 30 years, with each significant market event represented by a red dot2.
While many of these events, including the current pandemic, have created dips in the market, these are relatively insignificant compared with the overall growth. Consider the 2008 Financial Crisis. At the time, this felt insurmountable and life-changing for many investors. But the market bounced back, and anyone who either switched to cash or reduced their equity holdings would have missed out on the chance to make their money back.
When we recommend an investment, the long-term returns we consider take into account the highs and the lows. Volatility is a feature of investing. We expect it and we plan for it, on the understanding that the market generally moves in an upwards direction over the medium to long term.
What a Good Investment Strategy Looks Like
So, what can we do to ensure your portfolio offers the best chance of long-term growth?
- Confirm that you don’t need access to your investment in the short-term. An investment period of at least five years is preferable, as this is usually enough time to smooth out the worst of the market volatility.
- Ensure you hold a wide range of asset classes and invest across multiple industry sectors and geographical areas. Diversification provides the best chance of strong growth, while also limiting risk.
- Assess your attitude and capacity for risk to ensure that the portfolio is no more volatile than you can cope with.
- Plan any withdrawals well in advance.
- Seek returns in accordance with your financial plan and goals, rather than aiming to outperform the market.
Please don’t hesitate to contact your financial adviser if you would like to discuss your investment options. Note that the information in this article is generic and does not constitute financial advice.