'Time is the wisest counsellor'(Pericles, Athenian statesman, 425 BC)
In nervous markets, it can be hard to determine the best course of action to take. It may be tempting to delay making new investments until markets feel less volatile, or perhaps to sell existing holdings in case markets fall further. But making decisions like this can potentially be the downfall of even the most shrewd of investors.
Trying to predict market activity on a short-term basis is very difficult and, for the investor, can be fraught with danger. For instance, investors run the risk of missing out on some of the best days for stockmarkets, when significant gains could be made. We believe that the investor who stays invested for the long term is more likely to achieve his or her financial goals than the investor who chases ‘hot tips’ for quick profits in the stockmarket.
What’s more, although it’s a cliché, time can often prove to be an investor’s best friend because it gives compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest which can result in a boost to the value of your capital.
The example below demonstrates that an investor who stayed invested in the UK stockmarket over the past 20 years would have earned some good returns. But, as has been seen recently, markets can move sharply over short-term periods and any investor attempting to time their investment during these two decades could have missed the ‘best days’, consequently harming any growth potential. For example, the chart also shows that eve by missing just 10 of the best days over the entire 20 year period, the average returns earned in the UK stockmarket drop from 7.9% to 4.6% per annum.
Please remember that the past performance of any stockmarket investment should not be viewed as a guide to future performance.
Source: FTSE All-Share Index average returns, Datastream and M&G Statistics, income reinvested as at 31.10.11.
As you would imagine, the situation is more or less reversed if you take out the ‘worst days’ from the markets too. But of course, it is important to remember that these days are just as unpredictable as the best ones, and attempting to time the market to catch the good days while avoiding the bad ones increases the risk that short-term stockmarket volatility can bring to your portfolio.
Another way to illustrate the considerable benefits of taking a long-term view is to look at how stockmarkets have moved over the past 20 years in the UK, as measured by the FTSE All-Share Index (the UK’s benchmark equity index).
Source: Datastream, Morningstar and M&G Statistics, as at 31.10.11
To gauge how markets have behaved over short- and longer-term periods, we took returns from the start of each month, over every single year period (229 in all), for every five year period (181) and every 10 year period (121). Then, as illustrated in the chart above, we show the average returns per year over each of these periods for the FTSE All-Share Index. This also allows us to show the likelihood, on average, of investors having made or lost money during each time period.
History shows that the longer an equity investment (an investment in shares) has been held, the less likely it is to lose money and the more likely it is to make money. We believe the returns investors have historically received from the stockmarket show that it remains an extremely convincing investment over the long term.
Please remember that past performance is not a guide to future performance. The level of income from an investment can vary and the price of all stockmarket investments can fall as well as rise. As a result investors may not get back their original investments.
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