Why it can pay to keep calm and stay invested
While ‘time in the market’ can help investors to achieve their savings goals, attempting to ‘time the market’ can have the opposite effect.
Stock markets can bounce around in response to everything from changes in the weather to the latest tweet from the White House. For those who have spent some time nurturing their savings and investments, this may be unsettling.
But fluctuations in share prices do not necessarily translate into smaller savings pots. This is because long-term savers are armed with an incredibly powerful weapon: time. Even after dramatic declines, most stock markets have tended to recover in due course.
Following the financial crisis – when the future of capitalism itself seemed to be in doubt – the global stock market* took less than three years to rise above its previous peak in sterling terms.
Of course, history isn’t a guide to the future. Yet these sorts of episodes do point to the potential benefits of staying invested over the long term. By selling out of investments during periods of market jitters, in anticipation of possible losses, investors may miss out on the gains that can often follow declines in share prices.
The following chart helps illustrate this point, by showing what a £100 investment would have generated in returns, simply by staying invested throughout the entire period.
This outcome is partly due to the small matter of ‘compounding’ the income accrued from payouts by companies, known as dividends, which can help enhance returns and reduce losses over the long term. Compounding here is the process where you re-invest your dividends back into shares – enabling you to receive yet more income on your investments.
It is important to remember that past performance is not a reliable indicator of future results, and the value of an investment can go down as well as up. That said, we believe ‘time in the market’, or investing for the long term, can help you to boost your returns and achieve your savings goals, while attempting to ‘time the market’, by nipping in and out over the short term, can have the opposite effect.
* As defined by the MSCI World index, dividends reinvested.