This is the second in a series of articles looking at some of the key issues for successful cross-border investing, aimed at helping international investors secure their financial future.
Last month, you found out why not fearing market volatility is one of the ways to achieve long-term investment success.
In the coming months, we’ll also cover the effect of inflation and the importance of a diversified portfolio.
This month, you can find out about “timing the market” and why trying to do so can cause you to miss out on long-term investment gains, potentially damaging your wealth.
This article draws on data and insights from Dimensional, a globally respected investment firm and one of our trusted fund management partners, whose strategies many of our clients invest in.
Even experienced fund managers struggle to time the market effectively
Put simply, timing the market is an investment strategy whereby you buy and sell stocks through trying to predict movements in the value of individual shares and market sectors.
These predictions will be driven by economic conditions, research, and analysis.
It’s effectively the strategy followed by most investment fund managers, who will try to beat their respective benchmarks through their decisions on selling and acquiring stocks for their fund.
Yet, despite analyst teams and sophisticated computer modelling, according to Morningstar, only 14.2% of fund managers beat their equivalent index in the last 10 years.
This underpins the adage: “It’s time in the market, not timing the market”. It’s also why one of the most successful investors, Warren Buffett, has said that his favourite holding time is “forever”.
These charts give you a more detailed analysis of three reasons why trying to time the market can be so problematic.
Chart 1 – Markets don’t wait for official announcements
As an investor, you may worry about the stock market falling after a recession is officially announced.
However, history shows that markets factor in expectations ahead of the news.
This chart, which shows the performance of the S&P 500 index during the global financial crash, illustrates that point very effectively. It also offers a lesson in the forward-looking nature of the stock market.
Source: Dimensional
The US recession spanned from December 2007 to May 2009, which is the shaded area.
However, the official “in recession” announcement from the National Bureau of Economic Research in the US came in December 2008, a whole year after the recession had started. By then, stock prices had already dropped more than 40%.
Although the recession ended in May 2009, the official announcement came 16 months later, by which time US stocks had rebounded.
This illustrates that you need to look beyond after-the-fact headlines about markets and the economy, and why sticking to a long-term plan is likely to result in you enjoying investment success.
Chart 2 – The danger of missing the best periods of investment growth
One key point about trying to time the market is that, with all your investment decisions, you need to be correct twice: once when you sell and then again when you buy.
The impact of being out of the market for a short time can be profound, as shown by this hypothetical investment in the MSCI World Index, a broad stock market benchmark, between 2014 and 2023.
Source: Dimensional
A £1,000 investment made in 2014 grows to £2,956 over the 10-year period ending on December 31 2023.
However, if you simply missed the MSCI World’s best week during that time, the value shrinks to £2,713. Miss the best three months, and the total return falls to £2,305.
There’s no proven way to time the market, either targeting the best days or moving to the sidelines to avoid the worst.
Instead, staying invested and focused on the long term helps to ensure that you’re in a position to capture the market’s performance.
Chart 3 – A stock market peak is not a cliff edge
You may be tempted to think that a market high is a signal that stocks are overvalued. However, average returns one, three, and five years after a new month-end market high are similar to those after months that ended at any level.
This chart shows the MSCI World Index average annualised compound returns from 1970 to 2023.
Source: Dimensional
Across an extended investment time frame of over half a century, 29% of monthly closing levels were new market highs.
After those highs, the annualised returns ranged from almost 10% one year later to more than 10% over the next five years. These were close to average returns over any period of the same length.
Stocks are priced to deliver a positive expected return for investors, so reaching record highs regularly is the outcome one would expect.
Those three charts, and a plethora of other evidence, demonstrate that investment success does not come from reacting to every market movement or piece of economic news.
Instead, the best habit to adopt when it comes to your investment strategy is patience. Furthermore, doing nothing is, more often than not, the most sensible thing to do.
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At bdhSterling, we specialise in helping clients navigate the complexities of international financial planning. Whether you’re managing assets in multiple countries or planning a move abroad, our expert advisers can help you build a resilient, long-term investment strategy.
If you would like to discuss your own investments, please get in touch with us today.
Please note
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.