The recent spike in volatility highlighted once again that attempting to time the market is difficult and can be costly.
A month or so on from February’s correction, the bull run for equity markets has entered its tenth year. But it would be wrong for investors to assume that the recent return of volatility was a mere blip.
The S&P 500 fell by more than 10% over the course of nine trading days. That was the fastest drop into correction territory for the US market since World War Two. Yet within a week, more than half of that fall had been reversed. It meant that the worst week for markets since 2016 was immediately followed by the best week since 2015.¹
Investors who took flight as markets wobbled would have made a costly mistake.
The reality is that market volatility is the norm. From 1980 to 2015, every year but one (1995) saw the S&P 500 index fall at least 5%. ² Yet the latest bout of volatility came after two years without a dip of that magnitude, which is what took many investors by surprise. Indeed, last year was the quietest for US stocks since 1964.³
Yet there are plenty of reasons to expect more volatility in the months to come, as markets grapple with a changing economic and political picture. What’s vital is that investors do not allow short-term factors to distract them from their longer-term objectives.
As recent events illustrated, the sharpest falls and the biggest gains tend to be concentrated into short periods of time. If you react to markets falling by selling out, then you are likely to miss the recovery. Recent research by DALBAR shows that panic selling is a losing strategy, and it can be an expensive one.4
The chart below shows how damaging missing a small number of the best days would have been if you’d invested £100,000 in the UK stock market over the last 20 years. For example, missing just ten of the best days over the whole period would have reduced returns by over 45%.
Cumulative returns on a £100,000 investment over 20 years (FTSE All Share index)
Source: Financial Express. Stock market represented by the FTSE All Share Index. Data as at 31 December 2017
It’s only natural to be concerned about short-term fluctuations in stock markets. Crucial to long-term investment success though is the ability to accept and ignore volatility, rather than to try to anticipate it. The only certainty is that it is impossible to be sure how and when markets will move. Time in, not timing, is the key to investing.
The legendary investor Warren Buffett said, “The stock market is designed to transfer money from the active to the patient.” When it comes to investing, doing nothing is often best.
Past performance is not indicative of future performance and the value of your investment, as well as any income, can go down as well as up. You may get back less than you invested.
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¹,² M&G Investments, The Equity Forum, March 2018
³ www.marketwatch.com, January 2018
4 DALBAR’s 23rd Annual Quantitative Analysis of Investor Behavior, February 2017
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