Ride it out
History shows the potential dangers of allowing emotions to influence investment decisions.
This year has so far proved a challenging one for investors. Market indices in the US and UK have hit all-time highs, yet 2016 has also been marked by bouts of volatility and some sharp falls. Markets recovered from fears over commodity prices and Chinese growth at the start of the year, but were then buffeted by the Brexit vote in the summer. Yet markets bounced back once again. The US presidential election result may provide their next big test.
Of course, that is the nature of equity investing, but it is understandable that investors might be concerned about such short-term fluctuations. What’s also true is that the sharpest falls and largest gains are often concentrated into short periods of time. Investors who try to time the market to avoid the falls, or who lose faith and sell out at the bottom, are highly likely to miss the gains.
The chart below is a sobering reminder of the potential costs of trying to time the market. Even missing a small number of days in the market can have a devastating effect on an investor’s total returns. When it comes to investing, doing nothing is often best.
Cumulative returns on a £10,000 investment over 20 years – FTSE All Share Index
Source: FactSet, FTSE, J.P. Morgan Asset Management. Data to 31 December 2015. For illustrative purposes only. Assumes all income is reinvested. Returns calculated daily over the time period assuming no return on each of the specified number of best days. Please be aware that past performance is not indicative of future performance. Equities do not include the security of capital characteristic of a deposit with a bank or building society.
FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.