Unexpected, sudden market downturns can undermine Investor confidence. Understandably so. However, it is how investors react to such events, which can determine the value of their investments.

In summary, there are two main options available to investors in times of heightened market volatility. One is to try to time the markets, the other is to adopt a long-term view and hold on to investments. 


Which might be the better option?

Investors who try to time the markets inevitably, although perhaps inadvertently, experience taking on the risks associated with anticipating market increases, given that they are seeking to benefit from these. They are also involved in the risks involved in anticipating market decreases, as they seek to convert their investments into cash before these happen.

Conversely, investors who adopt a long-term view construct a portfolio and hold on to their investments, do so on the premise that, over the longer term, markets will deliver a good return, regardless of short-term volatility.
As advisers, we adopt the latter approach, not forgetting that we conduct regular reviews and when necessary, portfolio re-balancing. However, when faced with market conditions such as those that prevailed in the last 3 months of 2018 and into very early January 2019, it can be hard for investors to keep their view focused on the long-term. They can be sorely tempted to cut their losses and sell.

We adopt the long-term view because, despite heightened market volatility, we believe that this holding approach generates the better long-term outcome. In our view, it is not reasonably practical to predict on what day significant market increases will happen. 

Recent work conducted by Datastream* supports this view. They have found that sharp falls and gains in markets tend to be clustered together. They have also found that it is quite common for a large gain to follow a significant loss and that the reverse is true, too. As such, investors who try to anticipate when might be the best time to invest take a significant risk of missing the large gains. 

Evidence supplied by Datastream in support of this, is in the form of their analysis of the UK stock market over the last 15 years. By failing to capture just the best 10 days over this period, then the average annual return would have halved and fallen from 8.6% pa to 4.3%. Missing the best 20 days reduces this to 1.7% pa and 30 days to -0.4% pa.

It is a simple fact that no one can consistently invest with perfect timing. Some may get lucky occasionally, but the benefits of getting it right on those rare occasions are more than outweighed by the costs of getting it wrong. Hence, why we believe that it is more beneficial to adopt a long-term view and hold on to investments. 
  
* Source: Datastream from 28/09/03 to 28/09/18, annualised return. Returns based on the performance of the FTSE All-Share, with initial lump sum investment of £1,000 on a bid-to-bid basis with net income reinvested.

 

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