Why time in the market, not timing the market matters for your wealth

“Time in the market, not timing the market” refers to how investors tend to fare better when they buy and hold stock, instead of trying to time the market by buying and selling according to dips or peaks.

Some investors try to time their entry into specific markets in an attempt to capture the best prices. Problem is, it's incredibly difficult to make investment decisions based on short-term data.

Timing the market is impossible, even for the most experienced money managers

If you get it right, timing the market can prove lucrative. But success comes with a very big if.

Because misjudging the timing means locking in losses and missing out on gains, even the most experienced investors and star fund managers don't attempt to time the markets.

Research from leading fund managers, Schroders, reveals statistics that show the perils of trying to time the market.

Over 35 years – a common time frame when investing for retirement – poor timing decisions on a £1,000 investment could have cost almost £33,000 in returns. This is based on the best 30 days of investment growth over a 35-year period and measuring the effect of missing out on those days.

Proof that patience can pay

Alternatively, had you invested the same £1,000 in the FTSE250 at the beginning of 1986 and left it to grow for 35 years, by January 2021your investment might have been worth £43,595.

Over the last 35 years, your original £1,000 investment in the FTSE 250 could have made:

· 11.4% a year if you stayed invested the wholetime

· 9.5% a year if you missed the 10 best days

· 8.1% a year if you missed the 20 best days

· 7% a year if you missed the 30 best days.

The table below shows the value of what a £1,000 investment could have been worth in January 2021.

Source: Schroders, Refinitiv data Values shown are total returns, which include dividends and share prices between 1 January 1986 and 1 January 2021.

During periods of stock market volatility, it’s natural to be concerned. But the smartest investors will keep their cool, remain invested, and let things take their course.

Give your portfolio time to benefit from compound growth

While it can be tempting to try to time the market, it's important to remember why you're investing.

Most of us invest to grow our wealth with the aim of being able to afford a comfortable retirement, or other tangible long-term goal. For example, school fees while our children are still babies, a holiday of a lifetime, or to help children buy their first home.

Investing with a patient approach and allowing your money maximum time in the stock market should give your portfolio opportunity to benefit from compounding. Over time, this strategy tends to deliver results and grow your wealth.

Time in the market is helpful because returns come in fits and starts

The UK equity market has averaged a return of 5% after inflation since 1900. But, while growth has happened, it's never a smooth run.

Since returns come in fits and starts, experts encourage you to invest with a long-term view. Ideally, you should be happy to leave your money invested for a minimum of five years, although upwards of 10 is generally preferable.

With a long view, your portfolio will have time to recover from any short-term shocks and the longer you're invested, the more you will benefit from compound growth on your wealth.

Instead of trying to time the market, remember these investment rules

Instead of trying to increase your chances of success by timing the market, following these rules could prove more profitable in the long term:

· Invest sooner to allow your wealth to begin benefiting from the effects of compounding

· Use valuable tax allowances such as ISAs to reduce the impact of tax and improve potential returns

· Review and increase the amount you save and invest each year

· Keep costs low – costs and fees are one of the few things you can control

· Stay disciplined – if the markets spook you, remember the detrimental effects of missing just a few of the best days in the market.

Above all, keep in mind that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the associated risks of each investment.

The best approach to your portfolio is to invest across a range of markets and sectors. We can help you determine which investments may be right for you. Our holistic approach means any recommendations we make will take your goals, lifestyle ambitions, and risk tolerance into account.

Get in touch

If you want to invest to achieve your long-term financial goals, get in touch. Email enquiries@alexanderpeter.comor call us on +44 1689 493455.

Please note

The content of this article is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not indicative of future performance.

You might also be interested in:

Weekly Market Commentary - 26 May 2023
Weekly Market Commentary - 12 May 2023
One super simple way to play your part on World Environment Day
5 useful estate planning considerations if you have a big, blended family