Unless you’ve had the good fortune of spending the last couple of weeks on a desert island, you’ve probably noticed that volatility in the stock markets has picked up. If you’ve been reading the newspapers, you can hardly not have noticed the scaremongering headlines! Titles such as ‘Trillions wiped off global stock markets!’ or ‘The FTSE has had the worst start to the year since 1984!’ are everywhere.
How should one respond to this? The natural feeling would be panic– that’s what sells newspapers as everyone picks them up to see what terrible thing has happened and why. In reality though, investing in the markets means that, at some point, you will experience some volatility – it’s par for the course. Things go up and things go down, but in the very long run, they generally go up. We’ve been spoilt over the last few years as volatility has been fairly absent from the markets, as Central Bank policies have been constantly stimulating the markets.
As investors, the risk we face is that we read one too many of these newspaper headlines and decide to sell everything that feels volatile and put the cash under the mattress, where it feels safe. Why is this a risk? Well, investing is for the long term and over time, money in the markets generally grows. If you can leave it well alone and save regularly, your returns compound. By saving regularly, you are drip feeding money into the markets when they’re down, as well as up, which means over the long term you should be getting a decent average entry price to the markets. Saving regularly means that you’re disciplined and unemotional about a decision you made when you were rational – i.e. to invest for the long term. If your decisions are hijacked by fear and greed though, you can end up with poor results – fear will cause you to sell at the bottom and greed will cause you to buy at the top – precisely the opposite of what you need to do to make money in the markets – i.e. ‘buy low’ and ‘sell high.’
Fidelity International1 recently showed the power of staying in the market with some compelling figures. If you had put £1,000 into the FTSE All-Share 30 years ago it would now be worth £14,734. Quite a nice return. However, if you had tried to ‘time’ the market and not have kept your money fully invested over this period, thus missing out on the market’s 10 best days, your investment would now only be worth £7,812. That’s a reduction of nearly half. This shows that once you have committed to invest in the markets, it’s better to stay in (and close your eyes if you have to) than try and time the market to avoid the bad days over that period. If you had missed the best 20, 30 or even 40 days over that period the results would have been even more damaging to your returns – missing the best 40 days over the last 30 years your initial £1,000 investment would now only be worth £2,450.
The conclusion? Don’t try and time the markets – it’s nigh on impossible. It’s time in the markets that counts rather than trying to time the markets. One way of helping you stay fully invested is to run a diversified portfolio so that you have investments across different asset class and continents. That way you are spreading your risk so that you’re not held hostage to any one event. China slowing down? No problem. Greece playing up? Fine. Equities vs bonds relationship changing? It’s ok – diversification means you’re backing ‘several horses’ at once so should be able to ride out periodic events without too much of a hit on your financial (and emotional) capital. The latter is important as it stops you from panicking at precisely the wrong times. Investing sensibly by spreading your risk across asset classes, geographies and time (by drip feeding money into the markets) will help keep your mind calm so that your decision making capability is preserved when the investing seas get rough – which over a long investing period, at some point they inevitably will.
1Source: Fidelity International, Jan 2016