Why you shouldn’t time the market
The number crunchers at Fidelity International have looked at the effects of missing the best and worst days in the UK stock market over the past 30 years. They concluded that time in the market is better than timing the market.
An investor who invested £1,000 in the FTSE All Share index 30 years ago and stayed in the market the whole time would have investments worth £14,733. But if they had missed the best 10 days in the market since, they would have ended up with a total investment of £7,811 – a loss of £6,922.
Tom Stevenson, investment director for personal investing at Fidelity International says: "With the FTSE 100 recently falling 19% below the cyclical high of 7122.74 reached last April, investors will be unsettled.
“However, it should be remembered that volatility is the price you pay for the long-term outperformance of equities over other asset classes. Corrections often provide investors with an opportunity to add to their portfolios at attractive prices.
“That said, our analysis shows the risks of trying to time the market and how expensive it can be when you get it wrong. “
Moneywise also asked Fidelity to supply what would have happened if the investor had missed the 10 worst days. In this case, the investment would have increased to £31,268 over the same 30 year period. That would have been an gain of £16,535, which shows that perhaps if investors do try to time the market, their focus should be on reducing the downside. It’s all rather theoretical though.
“It’s difficult to predict the best time to be in and out of the market, especially as the best and worst days very often tend to be bunched together during periods of heightened volatility,” says Mr Stevenson.
“It’s usually more prudent to stay fully invested through market cycles as missing even a handful of the best days in the market can seriously compromise your long-term returns. As the old stock market adage goes; time in the market matters more than timing the market.”
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).