20 October 2022.
Why Time in the Market Is More Important Than Timing the Market
While the recent events and market performance of 2022 can stir up emotions and fear for investors, we must zoom out and view the investment landscape picture holistically.
Coming out of the Global Financial Crises, the decade to come would deliver a staggering 229.35%, using the MSCI World Index measured in US Dollars. 2021 would add a further 21.90% to this figure. While this year has erased last year’s gain, the figure from 2010 to the end of September 2022 is still an impressive 227.13% gain.
Low-interest rates, easy monetary policy and a boom in the tech industry, led by the US market, provided ideal conditions for companies and their shareholders to grow in value. The return, however, was neither linear nor a smooth ride. 2011 delivered a -3.58% return, while 2018 returned -1.26% and 2020 lost 23.41% before making a spectacular recovery, returning 11.66% by year-end.
Past performance does not indicate future performance, but we humans are products of our experiences. And five major financial crashes in the past 30 years have shown that emotions often dictate investor behaviour more than logical decisions. Author Carl Richards states, “We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right – but it’s not rational.”
If you, at any point during this cycle, panicked and sold your investments into cash to curb losses while waiting for a better time to buy back in, you likely missed some of the best days in the market over the last decade.
No person on earth can time the bottom day of the market, which ironically is followed by the best days in the market. Even with our years of wealth management experience and economic knowledge, our focus remains on acting on our understanding of how market returns work and what previous cycles can teach us rather than tracking short-term value movement.
The below graph shows what would have happened should you have missed some of these days. Missing the best ten days out of 3 650 days would have seen your investment 33% worse off. In fact, missing the best 40 out of 3 650 days would have seen your capital value decrease.
While looking at historic returns may not ease the emotional roller coaster of receiving a valuation every three months, we must understand that time in the market is the most important aspect of investing in equity. The recommended time frame for an equity investment is five years. However, this is the minimum; once invested, the purpose of equity is to grow capital above inflation for a long-term need such as retirement. Even in retirement, we continue to hold equity with the portion not intended for income in the short and medium term. Therefore, provided we live until 90, equity investment time horizons are generally greater than 50 years, and for others who invest before the age of 40, even longer.
The idea behind the string of words above is to keep the big picture in mind as we receive our valuations for the year. We’ve come to know that time, talent, and collaboration are integral in reaching and exceeding your investment goals. By overcoming market-related anxiety, keeping our emotions in check and heads level, we will be able to remain present with your business and personal needs while statistics and facts prove our emotional thoughts and worries wrong. Since data was recorded in 1971, as of July this year, there was not a 13-year period where you would have lost money in the equity market. The longer you remain invested, the higher the probability of growing your capital.
Furthermore, even if you were the worst investor in the world, investing once every decade at market highs, you would still have averaged 8.29% per year in USD, well above inflation over your investment lifetime.
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PWM is a boutique wealth management company in South Africa providing bespoke investment services to affluent individuals
We provide independent, expert advice on local and offshore investment funds, portfolios and structures. We have access to a vast, customizable range of investment options from across the global market. As a result clients benefit by receiving the most appropriate advice and solutions for their varying and specific needs. Our business operates within a highly regulated environment therefore ensuring that the highest professional standards are maintained while keeping the best interests of our clients in mind. For this reason systems have been put in place to ensure full compliance with all regulatory requirements.
Disclaimer: The research report has been prepared for information purposes and does not constitute an offer. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and the company accepts no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this report
