HomeFinance It’s time in the market – not timing the market – that reaps rewards
It’s time in the market – not timing the market – that reaps rewards
Wednesday, 13 November 2019
Andrew
Southgate, Private Client Manager, Blevins Franks
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When investing, a long-term, diversified strategy usually produces better overall returns than chasing short-term gains.
Given current Brexit concerns and global economic uncertainty, we hear many people ask whether this is a bad time to invest. The simple answer is that it is not so simple! Generally, the most sensible approach is to invest for the long-term rather than wait on the side-lines for the ‘right time’.
The risks of trying
to time the market
It is impossible
to accurately and consistently predict market movements. At any time, external events,
investor sentiment and even rumours can have a negative or positive impact,
often unexpectedly and suddenly. Reacting to current conditions is usually too
late, so to be successful, you would need to foresee both the best time to buy
and to sell. Even experienced investors cannot get this right all the time.
Then there is the
risk of missing out. It is surprising what a difference certain days in a
market cycle can make to returns. If, for example, you are not invested because
you are waiting for share prices to stabilise after a period of volatility, you
could miss benefiting from rebound days if the market suddenly rallies.
To illustrate
this, if you had invested £10,000 in the FTSE All-Share index for the full ten-year
period up to 31 December 2018, you would have earned a profit of £4,754 (excluding
fees or charges). But if you missed the five best days, returns would fall to £3,764,
and again to £2,081 if the ten best days were missed. Meanwhile, being out of
the market on the best 20 and 30 days would have brought respective losses of £132
and £1,896.
While it may feel
uncomfortable to stay invested when markets fluctuate, this discipline usually
produces better returns over the longer term than chasing short-term gains.
Investment
performance: The bigger picture
It is all too common
– especially in the media – to remember the extreme market highs and lows
without looking at the overall picture. Most will be aware of 1987’s ‘Black
Monday’ global stock market crash, for example, without realising that
investors in the FTSE All-share index actually realised a 4% return over the
year.
There also tends
to be a focus on share market performance, particularly in one key region, such
as the FTSE100 in the UK or the S&P500 in the US. However, wise investors
will never have all their interests in one asset class (e.g. equities) nor in
one geographical region. So when we hear about shocks in one share market, this
overplays the actual impact on most investors.
The best strategy
for minimising risk is to diversify by spreading investments across multiple,
unrelated areas. This should include a range of different asset classes (shares,
bonds, cash and ‘real’ assets such as property) as well as geographical regions
and market sectors. Diversification gives your portfolio the chance to produce
positive returns over time without being vulnerable to any single area or stock
under-performing.
Choosing an
adviser who uses a dynamic ‘multi-manager’ approach can help increase
diversification. By combining several carefully selected fund managers, this
reduces reliance on any one manager making the right decisions in all market
conditions.
Establishing a
suitable investment approach
When investing,
it is crucial to carefully assess your situation, income requirements, goals
and timeline alongside your appetite for risk. This is best done objectively by
an experienced professional who can then build a diversified portfolio with the
right balance of risk/return for your peace of mind. Your arrangements should
also be structured as tax-efficiently as possible for your life in Spain/ Talk to
a locally based adviser with cross-border experience to make the most of
available opportunities.
If today’s
climate still makes you nervous, you could consider spreading the timing of
your investments over a period by investing in tranches. The ‘pound (or
euro/dollar) cost averaging’ approach can help smooth out volatility and
potentially improve average returns over longer time periods.
British
expatriates may also benefit from exploring investment structures that have a
multi-currency facility to minimise exchange rate risk. This would allow you to
invest, for example, in sterling now and then switch to euros as you wished,
and choose the currency of withdrawals.
Ultimately, a
long-term, diversified investment approach is vital to help protect and grow
your capital, whatever the economic climate. While a ‘keep calm and stay
invested’ approach usually gives the best overall results, make sure you still review
your planning once a year, or sooner if your circumstances change, to continue
meeting your long-term financial goals.
All advice received from Blevins Franks is
personalised and provided in writing. This article, however, should not be
construed as providing any personalised taxation or investment advice.
You can find
other financial advisory articles by visiting our website here
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