News outlets are debating whether the UK is going into a recession, officially we’re not there yet but we are undoubtedly in a downturn.
In a previous article on investment planning we explored what the impact of a recession could be on investment markets. This time we explore the challenge of remaining calm and focusing on the long term rather than trying to time the market.
It is easy to think that the best way to extract returns is to ‘time the market’, that is to buy an investment when it is priced low, and to sell it as it gets high. If perfectly executed, this strategy would yield phenomenal return on investment by removing any downward movement in the price. However, if wrongly timed by even a day or two, it can potentially lead to a worse result than not having interfered in the first place. Clearly, timing the market is a risky game, it requires a lot of knowledge and expertise about the markets, as well as a significant amount of luck.
That’s where the idea of ‘time in the market’ comes in. Instead of trying to predict when to buy or sell, the strategy is simply to stay invested in the market over the long term, ignoring the short term ‘noise’ of market volatility. Market movements are difficult to predict, even for seasoned investment professionals. Whilst episodes of volatility in rising or falling markets are completely within the norm, trying to time the ‘perfect’ entry and exit point is extremely difficult and can result in a negative outcome relative to taking a more patient approach as shown in the table below.
3 April 2002 – 31 March 2022
|FTSE 100 returns
|Fully invested (all days)
|Minus 10 best days
|Minus 20 best days
|Minus 30 best days
|Minus 40 best days
Markets generally trend upwards over the long term
The FTSE All Share Index has endured many challenges and several periods of heightened volatility. Despite this, over the long term we see a significantly higher value for investors who stay in due to the benefits of compounding and simply spending more time in the market resulting in a greater return over time.
The current market environment and the challenges investors face are very complex; however, the solution is generally simple. The best results have historically come to those who remained calm in times of market distress and stay true to their original objectives, taking a long-term view.
At Francis Clark Financial Planning, we continue to believe that high quality investments into a mix of asset classes in a geographically diverse strategy remains the best route for the majority of investors. We are also mindful that as the economy enters into the next phase of the market cycle, the coming years may not be quite as easy as the prolonged ‘bull’ run we witnessed from 2010 up to the outbreak of the Covid pandemic. If you would like advice on information on investments, please get in touch.