During periods of heightened financial market volatility and increased levels of uncertainty it can be tempting to try and ‘time the market’ by selling assets and then buying back into the market at a later stage. For example, in the run-up to the vote on Brexit, many investors decided to sell down their portfolios to 100% cash. Although we saw an initial 3% dip, the FTSE 100 then rose by about 20%, leaving investors struggling to know when to buy back into the rising market. Missing those crucial 55 days following Brexit would have nearly halved your returns over the next 23 months (giving a return of just 17% vs 29%).
We can learn three key lessons from this:
- Political events (such as Brexit) often don’t have as big an impact on financial markets as anticipated.
- Even if you are able to guess the correct outcome of a political event, the market doesn’t always react as you had predicted it would beforehand.
- Finally, timing the market is virtually impossible, even for the most experienced investors.
Missing out on just the 10 best days in the market since 2002 would have left your assets in negative territory. On the contrary, remaining fully invested over that same period would have resulted in a return of 69%.
Market timing is extremely hard as the speed at which markets can bounce off the “bottom” can mean that investors miss the crucial upturn that can generate such a large part of returns (as seen in the days following the Brexit). The pace at which markets react to news means stock prices have already absorbed the impact of new developments and when markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the bounce.
In the long run, markets move in cycles. Over short periods, markets can be more volatile and result in a wide range of positive or negative returns. But the longer you stay invested and ignore the market chatter, the greater the probability that your investment will generate a positive return.
If you have any queries regarding your own investment portfolio’s, please contact the Foresight team on 0161 926 9350.