Snapshot

$25,857: the cost of trying to time the market


“Buy low, sell high” – that’s every investor’s goal. However, it’s easier said than done.

In practice timing the market is notoriously difficult. It can also be costly. Our research highlights potential losses if your attempts to time market highs and lows go wrong.

This year has seen market volatility in the wake of Russia's invasion of Ukraine, increasing inflation, interest rate rises and other factors. But it is just one recent instance of volatility. The drop in share prices at the onset of the pandemic in 2020 – and the strong recovery since – is another dramatic example.

Time in the market - not timing the market

Over 34 years, mistimed decisions on an investment of just $1,000 could have cost you more than $25,800-worth of returns.

Our research examined the performance of several major stock market indices, reflecting the performance of the US and UK market. These were the S&P500, the FTSE 100, the FTSE 250 and the FTSE All-Share.

How it plays out with US stocks

If in January 1988 you had invested $1,000 in the S&P500 and left the investment alone for the next 34 years, it might have been worth $31,223 by June 2022 (bear in mind, of course, that past performance is no guarantee of future returns).

But the outcome would have been very different if you had tried to time your entry in and out of the market.

During the same period, if you missed out on the S&P500 index's 30 best days the same investment might now be worth $5,366, or $25,857 less – not adjusted for the effect of charges or inflation.

If you missed only the ten best days you would still lose out substantially: you would end up with just $14,304, less than half of the outcome had you remained invested and captured the growth of those ten top days.

Over the last 34 years your original $1,000 investment in the S&P500 could have made:

  • 10.65% per year if you stayed invested the whole time
  • 8.13% per year if you missed the 10 best days
  • 6.47% per year if you missed the 20 best days
  • 5.06% per year if you missed the 30 best days

The 5.59 percentage point difference to annual returns between being invested the whole time and missing the 10 best days might not seem much.

But the compounding effect builds up over time, as shown in the table below.

How it plays out with UK stocks

If you had invested in the FTSE 100, efforts to time the market which led to your missing the 30 best days could have cost you more than £12,000 during the same time-frame.

If you'd stayed invested in the FTSE 100 for the entire 34 years, your annual return would have worked out at 8.31%. Miss the 30 best days, and this drops to 3.38%. The difference is a costly 2.93 percentage points in annual returns compounded over the period.

Staying invested the whole time vs timing the market

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Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

When observing returns over long periods, investors should also bear in mind that markets can be volatile, with many fluctuations up and down during the timespan.

Nick Kirrage, a fund manager on the Schroders value investing team, said: “You would have been a pretty unlucky investor to have missed the 30 best days in 35 years of investing, but the figures make a point: trying to time the market can be very, very costly.

“As investors we are often too emotional about the decisions we make: when markets dive, too many investors panic and sell; when shares have had a good spell, too many investors go on a buying spree.

“At times over the last three decades you would have to have had nerves of steel as an investor.

“They have included some monumental stock market crashes including Black Monday in 1987, the bursting of the dotcom bubble at the turn of millennium and the financial crisis in 2008, to name but three.

“The irony is that historically many of the stock market’s best periods have tended to follow some of the worst days.

“It’s important to have a plan of how long you plan to stay invested, with that plan matching the goals of what you’re trying to achieve, be it money for retirement or your children’s university education. Then it's just a matter of sticking to it - don't let unchecked emotions derail your plans."

Speak to a financial adviser if you are unsure as to the suitability of your investment.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.