Anyone who claims to have a crystal ball that can predict the best time to cash out of an investment should be viewed with a generous helping of scrutiny. ‘Timing the market’ may seem like the most logical or conservative thing to do when you’ve invested a large chunk of your savings into something and the economy starts to slump. However, pulling an investment from the market prematurely often doesn’t mean that you’ve dodged a bullet. Instead, it just means that your investment didn’t have enough time to mature in the market.
In this blog, we’re looking at why time in the investment market always trumps market timing.
Market volatility is inevitable
Over the past couple of years, we haven’t just witnessed events that have affected the global economy – we’ve experienced them first-hand. The Covid-19 pandemic saw a huge percentage of the workforce losing their jobs as entire sectors had to shut up shop for months and even years at a time.
However, as unexpected as the pandemic may have felt, it’s not the first time that we’ve experienced economic turmoil, and it certainly won’t be the last.
Market volatility is cyclical. History has proven that bull and bear markets alternate over time. A bull market occurs when the market is rising at a higher-than-average rate, while a bear market occurs when share prices fall. The positive thing about bear markets is that they are generally short-lived. Over the past 75 years, bull markets have lasted for an average of 49 months, whereas bear markets have lasted for an average of just 13 months.
Therefore, it’s fair to say that when you’re investing long-term, it’s generally more fruitful to hang in there than to feel the pressure and cash out because the market is dropping. Peter Lynch who ran the Fidelity Magellan Fund for 13 years has a now-famous quote about timing the market – “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
The difference a day makes
While there is always an element of risk involved in investing and the ‘perfect day’ to leave the market doesn’t exist, the concept of time in the market is something that consistently contributes to a successful investment portfolio.
Time in the market is all about perseverance. When funds are withdrawn prematurely due to rash decision-making, it means that they simply do not have time to recover and grow. J.P Morgan demonstrated that by missing the best 10 trading days between 1999-2018, your potential return would be halved. The most interesting fact about this? 6 of these 10 days actually took place within two weeks of the 10 worst days.
If you consider all of the global events that occurred between 1999-2008, you could see how easy it would have been to think that withdrawing an investment early was a sage move. However, the reality was quite the opposite.