Time in the market not timing the market is the key to investment success

Time in the market not timing the market is the key to investment success

Time or Timing?

Time in the market not timing the market is the key to investment success.

As we find ourselves in yet another period of uncertainty, it is important for investors to remain calm and consider their long term goals before making any changes to their portfolio.

Markets & Inflation

Stock markets have experienced a dramatic sell off over the last few months, triggered by Russia’s invasion of Ukraine and the global threat that represents to safety, energy and food supplies and the revenue losses to the many listed businesses that either voluntarily, or due to sanctions, withdrew from the Russian market.

Inflation has shot up to a 40 year high with petrol and energy prices jumping up significantly. This creates a difficult situation for investors, where their portfolios may be dropping in value but moving to cash will still represent a loss of 8-10% a year as its buying power is eroded.

What can investors do?

The most important factors to consider are your tolerance to risk, your investment horizon and the costs associated with your portfolio. These factors should determine an investor’s response to market changes.

If you are invested for the long term and have no requirement for withdrawals in the next 5-10+ years, then the best option is always to remain calm and ride it out. If your risk tolerance is medium to high, you may even consider continuing to deploy capital into the markets. If your investment horizon is 20+ years, this may be an even more appealing option.

The worst thing a long-term investor can do is to submit to fear or panic and exit the markets when they get volatile. Investors should focus on the things they can control like how much and how consistently they save, how well maintained and diversified their asset allocation is and what fees they are paying on their investments.

The best days in the markets typically follow the worst days:

Panic selling is detrimental to a long term investor because historically, the best days in the market have been very soon after the worst. Between 2000 and 2020, six of the seven best days occurred after the worst day and seven of the ten worst days were followed the next day by top 10 returns.

Some good examples of this happening in recent memory were March of 2021 when the S&P 500 dropped by 9.49%. The very next day it went up by 9.32%. In August 2015, the 24th was the worst day of the year and the 26th was the best day of the year.

How long does the market take to recover?

It is unlikely that anyone can accurately predict how long it will take for the markets to recover or if they will get worse before getting better. However, we can look at previous data to try and get an understanding of how similar events impacted markets in the past.

Since 2009, there has been a total of 24 dips in the S&P 500 of more than 5%, with the quickest recovery taking just 7 days.The longest recovery period since 2009 was 267 days, less than a year for the markets to recover from a decline of 15.2%. The largest recent drop in the S&P 500 occurred at the start of the coronavirus pandemic, with a drop of 35.4%. The recovery took just 33 days.

Looking at a longer time frame does show a different picture. From the S&P 500’s high in the year 2000, it took 7 years before the index reached the same level, and from 2007 it again declined and took 6 years to return to its 2007 high.

The good news is that regardless of the time it takes, the market has always recovered over the longer term.

Impact of disinvesting:

Time in the market not timing the market is the key to investment success

If you have concerns about your portfolio, speak to one of our team to find out what your options are and whether making any changes would benefit your portfolio and investment goals. If you are not yet a client of Brite, we would be happy to review your investments to see if there is anywhere we can reduce investment costs and improve your returns.

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