As the old adage goes, successful investing is all about ‘time in the market, not timing the market.’ What does this mean? It means you shouldn’t try to get into and out of the stock market at exactly the right moment. Indeed, this is impossible to do, even for the professionals. A better strategy is simply to stay invested for as long as you can, riding out the ebbs and flows that are inevitable in financial markets.
Why can’t I time the market?
The main problem is that sometimes emotion drives stock market movements, and this can be hard to foresee. Public investment markets are made up of billions of people trading trillions’ worth of assets, primarily acting on the same publicly-available information. This means that, usually, asset prices are determined on a ‘willing buyer, willing seller’ basis, and you get assets that are priced fairly close to their true value. But, when emotions are high, the madness of crowds can result in extreme changes to the underlying prices of investment assets.
No-one can predict when or why emotion will cause a change of direction for the market. Too many people have destroyed their financial futures by becoming short-term speculators when they should have been long-term investors. As economist John Maynard Keynes famously said: “the markets can remain irrational longer than you can remain solvent.” The chart below shows the long-term ups and downs of the market. You’d have to be on your toes to get in and out at the right time given these many peaks and troughs.
What happens when you get it wrong?
The chart below shows the huge potential impact on your overall returns over a 20 year period if you were to miss the best days for stock market performance. It suggests that if you invested £10,000, missing the 60 best market days would result in a portfolio value a staggering 87% lower than had you stayed invested for the whole 20 year period.
Sounds risky, should I just keep my money in cash instead?
Deposit rates on cash might sound appealing at the moment, given the inherent risks of investing. But there are a few reasons why we don’t think holding cash is the solution.
The inflation dragon
A big argument against keeping your money in cash instead of investing it is the impact of inflation. When we talk about inflation, we’re talking about how much more expensive everyday goods and services become over time. As prices rise, the value of your money reduces in real terms because you can no longer buy as much you could before.
Money is only good to the extent that it can buy more in the future than it can today. The major challenge we face is that inflation corrodes this purchasing power. To beat inflation, you need your money to grow at a faster rate than prices are rising. Historically, investing in the stock market has achieved this, as the charts below show.
History has taught us that cash does not provide a return greater than inflation after tax over the long term. Additionally, if the interest is not re-invested, our capital base does not grow either. A benefit of cash is the very low volatility, but this comes at a very big trade-off in long-term purchasing power.
The case for global investing
There is certainly a place for cash savings accounts, which can be a safe place to park money you may need in the short term. However, we advocate for a diversified portfolio of global equities, bonds, and other types of assets such as property and infrastructure as a way to consistently achieve inflation-beating returns over time.
When we invest in the great companies of the world through global equities, we are not lenders to banks or governments but owners of real, profit-producing, productive companies. These profits are either re-invested into attractive projects or distributed to shareholders as dividends. This dividend is often lower than the return on cash, but this is only one element of our return.
The second element of our return as equity investors is the growth in the capital value of our shares. Historically, share prices have grown as corporate profits have grown. Corporate profits rise due to innovation and the ability to pass on inflationary increases to consumers. This means that, over time, dividends also increase. The net result is long-term returns which beat both inflation and the returns on cash. This is the engine that helps us preserve our money’s long-term purchasing power.
There is a cost for earning this return: we must be willing to endure short term declines in value of our investment portfolio. History shows that these declines are usually temporary, and the way to earn material returns as an equity investor is to stay invested at all times, as the consequence of missing the best days in the market is significant.
Consequently, at atomos we believe in the wisdom of sticking with a long term investment approach through the market cycle.
If you have any questions about what you have read here, please feel free to contact us.
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All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.