When Doing Nothing Is Best
The fall in the FTSE All Share Index from its peak on 8th October 2007 to its low on 20th October 2008 has totaled 43.5%. I would hope that no one reading this was 100% invested in the stock market as that it a large fall in anyone's book! Many clients are asking what should I do, stick with it or encash my investments and look for something safer?
My response is that 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 this current period of uncertainty.
Few investors would dispute the fact that, over the longer term, stock market investments have significantly outperformed the returns available from bank and building society deposit accounts. Investors also know that stock markets are prone to short-term fluctuations and sometimes these can appear to be quite sharp. It can be tempting during times of stock market 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.
Just as the sharp falls in stock markets 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.
Missing the best 10 days from the last 15 years* has reduced annualised returns from the US and UK stock markets by around a third, and even more in other markets. Missing the best 40 days has had an even more dramatic affect on all markets. Far from minimising investment risk, market timing is in fact a high risk strategy. Naturally if you were able to miss the worst days of the stock market you would see a higher return than staying invested. However this would be more a case of luck than strategy as stock market falls are notoriously difficult to predict.
Remember time in the market, NOT timing, is the key to investing.
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