Stockmarket Volatility: When Doing Nothing Is Best
March 15th, 2007
Should stockmarket uncertainty affect your investment strategy?
During times of stockmarket uncertainty, it’s only natural to be concerned about how this affects the value of your investments. Investors often ask what action they should take in response. Many experts agree that investors will usually be better off resisting the temptation to make changes to their long-term investments simply because of short-term stockmarket movements. If your personal circumstances and investment goals are unaltered, and you are still able to take a medium to long-term view, then it is probably appropriate to ’sit tight’ through any periods of uncertainty.
Why market timing doesn’t work
Few investors would dispute the fact that, over the longer term, stockmarket investments have significantly outperformed the returns available from bank and building society deposit accounts. Investors also know that stockmarkets are prone to fluctuations and sometimes these can appear to be quite sharp.
It can be tempting during times of stockmarket uncertainty to delay making new investments or even consider selling existing investments and try investing again when values are lower – this strategy is known as ‘Market Timing’.
Whilst ‘market timing’ sounds fine in theory, it seldom works in practice.
Market Timing - It’s too easy to miss the gains
Just as the sharp falls in stockmarkets tend to be concentrated in short periods of time, the best gains are similarly concentrated. Because these gains often occur just before, or after, a market fall - an investor who tries to time investments is highly likely to miss the best gains. Fidelity has analysed the returns from the UK, US and other stockmarkets over the period 1991 - 2006. This shows that missing just a few days’ stockmarket performance can significantly impact performance.
Missing the best 10 days reduced annualised returns from the US and UK stockmarkets by around a third, and even more in other markets. Missing the best 40 days saw UK and US market returns cut by around 90%, with even greater lost returns in the other markets. Far from minimising investment risk, market timing is in fact a high-risk strategy.
Remember time, NOT timing, is the key to investing.
Please note that past performance is not a guide to the future, and you should be aware that the value of an investment can fall as well as rise.
Author: Philippa Gee
March 15th, 2007
Category: Investments.
