In the current environment of low growth and high inflation, these are obviously tough times for investors but, even before such factors are taken into consideration, many are not giving themselves the best possible chance of participating in any positive stockmarket performance.
When times are hard, investors will often grow nervous, decide to sell and then sit on the sidelines. As share prices increase, they start to feel more comfortable and may decide to invest again but this is likely to be a time when the valuation of the market is less attractive and there is a high price to pay for their comfort.
Put simply, the price these investors pay is they will sit out of some of the best days of market performance. Investors who remained in the market for the 15 years to November 2011 would have enjoyed an average return of 6.3% a year and yet, if they had missed only the 10 best days of performance, that average return drops to 2.3%. Miss the best 30 days and the return is in negative territory, at -2.6%.
So, even using a reasonably long data set, simply being out of the markets for a handful of the best days means your ultimate returns will not be as strong as the market as a whole. A quick look at flows of money into and out of UK equities over the last decade or so reveals how bad most people are at picking the right time to invest or sell up.
The twin responses of nervousness and a desire for comfort mentioned earlier have seen the majority of investors buying at the top of the market and selling or failing to buy at the bottom – with large amounts of cash flowing into UK equities in 2000, out in 2003, in again during 2006 and 2007 and out once more in 2008 and 2009. The latter was a year in particular when, as we said at the time, investors should really have been throwing cash at the market.
‘Time in’ the market, as the old saying goes, is more important than ‘timing’ the market although, rather than leaving yourself a hostage to fortune on any individual day, you might consider ‘pound-cost averaging’ through regular savings. Either way, it is vital to buy into a long-term approach you believe in and then stay the course.