If experience tells us anything, it’s that investing really is all about time, not timing. Trying to ‘time’ the market can be extremely difficult to do, even for the most experienced traders out there. Invariably we will miss the bounce while we wait to see if things really are on the way up. The reverse is also true; once we see a decline in the markets, it is already too late, if we sell now we are crystallising a loss.
There’s an interesting piece of research carried out by Bank of America that quantifies just how large the missed opportunity can be for investors who try to get in and out at just the right moment. They took a long period of time, right back to 1930. They found that if an investor missed the S&P 500’s 10 best days each decade, the total return on capital would have been +28%. However, if the investor had held steady through all the ups and downs along the way (of which there were plenty!), the return would have been 17,715%. This sounds incredible, but it’s true – missing the best 1 day per annum on average in the market can have a major impact on overall returns.
So what is the recipe for a successful investment portfolio?
- A realistic goal from the outset. Are we targeting a particular sum of money at some date into the future e.g. a college fund. Or are we trying to grow our savings account by a set amount each year to guard against future inflation? Setting a clear and realistic goal at the outset can give us a yard stick as to how our portfolio is performing over time.
- A diversified risk-appropriate portfolio. It’s no use doing what our friend / colleague / neighbour is doing if the worry is going to keep us awake at night. A lack of confidence in the strategy may cause a knee jerk reaction when markets take a dip, thereby derailing our strategy at the wrong time. Some work at the outset to match your attitude to investment risk with an appropriate portfolio can make the investment journey a much more comfortable ride. Similarly, investing in just one stock / industry / property may seem like a ‘sure thing’ at the time but can be a recipe for disaster. It is a high risk move and not one that a good advisor will recommend to you. All the time in the world won’t help if you have invested all your savings into one failed stock.
- Time! Warren Buffet is famously quoted as saying ‘someone’s sitting in the shade today because someone planted a tree a long time ago’. Understanding the importance of time when it comes to investing is critical to the chances of achieving our goals. Based on past history, if you invested in the stock market for 1 year, your chance of losing money would be greater than 1 in 4. But if you invested for 10 years, that number would drop to about 1 in 25, and after 20 years, to zero. This assumes you’ve spread the risk rather than investing in just one stock or sector of course.
One of the greatest enemies to a successful investment journey is our own innate behaviour. Studies in the area of Behavioural Finance are extensive and serve to highlight a lot of the pitfalls we as humans can succumb to. The following chart illustrates the thought process that can ultimately result in investment losses:
We can feel that doing nothing is not an option and we begin to second guess our strategy or ‘over-managing’ our investments. If we change this, move that, buy, sell, rebalance we will surely add value. Not usually so. Our resolve can be tested during volatile market phases – The Great Financial Crisis of 08/09, Covid moving from East to West and currently the devasting invasion of Ukraine by Putin. While these life changing events can be major causes of concern to us on many levels, what they should not do is derail our long term strategy. The buy and hold strategy consistently proves its value time and time again, confirming the old adage – Time, not timing, is what matters.
