Ian Cowie has written an interesting article in the Times on ‘why time in the market’ is more important than trying to ‘time the market’.
Goldman Sachs gave global stock markets a bit of a shock last week when the world’s best-known investment bank warned share prices were due a “rather painful . . . sharp correction”. Sure enough, the Standard & Poor’s 500 index slipped 2.1% lower on Friday, after concerns the US Federal Reserve might raise interest rates soon. The FTSE 100 also edged down 0.6% on Friday.
A few days earlier, Bank of America Merrill Lynch also said it was “very likely” share prices would fall in the next few weeks.
Both banks emphasised they were not predicting a prolonged bear market but were reacting to the longest period of rising prices yet seen. The Standard & Poor’s 500 index, a broad measure of American stock markets, and the MSCI World Index, a global benchmark of about 1,650 big companies’ shares, have both set new records for the longest runs without falling by 5% on a single day.
Peter Oppenheimer, Goldman’s chief global equity strategist, said: “This does not mean the market must have a correction. It just suggests that one is overdue.”
This may come as music to the ears of many people who have yet to participate in the upward trend in share prices that began nearly nine years ago. However, switching into cash is the easy part of market timing because the individual can congratulate him or herself on standing back from excessive exuberance elsewhere. Buying back into shares after prices have plunged and confidence has collapsed will be the difficult bit.
I believe the only sensible strategy for long-term savers, as opposed to short-term speculators, is to remain invested in shares and share-based funds. Even if you have a crystal ball — or, like Goldman and Merrill, another means of predicting share price movements — it can be a costly mistake to stay too long in cash, as research from Fidelity International shows.
At the request of The Sunday Times, the fund manager has analysed historic fluctuations in the FTSE All-Share index, a broad measure of British shares, over the past 30 years. To turn a spreadsheet into a story, our three example investors have been named Bad Timing Bob, Good Timing Gary and Steady Steffi. Each set out with the same sums to save or invest but with very different strategies.
Each set aside £1,000 in January 1988, and the same sum the following year before setting aside £2,000 each January through the 1990s, then £3,000 a year through the noughties and £4,000 each January during the current decade. Over the past three decades, they each set aside a total of £88,000.
Bad Timing Bob initially kept his savings in cash, earning 0.75%, only ever investing in the stock market after confidence and the All-Share index had peaked and both were about to fall. This technique meant he retired last month with a fund worth £150,890.
Good Timing Gary also initially kept his savings in cash but, unlike Bob, only ever invested in the stock market when confidence and the All-Share had hit rock bottom and both were about to rise. This technique, perhaps unsurprisingly, had the happier outcome of building a fund worth £221,185 by January 2018.
Now here’s the big surprise. Steady Steffi never bothered with deposits and always put her money into the stock market every January and left it there, come rain or shine. Her “buy and hold” approach to investing in the All-Share meant she retired last month with a fund worth £285,884.
How did she do so well? Tom Stevenson, a director at Fidelity, said: “Second-guessing the stock market is a mug’s game. If your timing is as bad as Bob’s, the consequences can be very costly. Even if you have the skill or luck of Gary, earning a paltry rate of interest while you wait for the right time to invest can seriously compromise returns.”
There will always be “painful corrections” or nasty stock market shocks. But for those of us who lack a crystal ball or even expert guidance, time in the market is a better way to build wealth than trying to time the market.
If you would like to discuss investment planning centred on your personal circumstances, please contact us >>