Those individuals who do try to time the market, can often end up buying high and selling low. It very rarely pays off and when it is successful, it’s usually more down to luck than skill and highlights that time in the market is perhaps more important than timing the market.
Let’s expand on this theme a little further. The performance here is based on our Governed Portfolio 4 from January 2009 to the end of March 2021. We’re assuming an initial investment equalling £100,000 and the figures are shown net of a 1% charge.
Source: Royal London, 31/03/21
It needs to be pointed out that the figures are for illustration purposes only, and are to demonstrate the possible effects of mis-timing the market. It's not intended to highlight the relative performance of any one fund or sector.
The first column shows an annualised return of 8.12% over this period generating a pot of £269,387. The second column shows what the impact would be on the annualised return and what the amount in the pot would be if you missed the top five days over this period. The pot size has now reduced to just over £228,000.
The third column takes the top 10 performing days out of the equation but it’s the final column which really underscores the significance of time in the market. This column shows the impact if you remove the top 20 days and if you compare this directly to the first column where you are fully invested – the annualised return has shrunk from 8.12% to 3.93% and the pot size has reduced by over £106,000.
Markets don’t usually require investors to sit tight for too long and yesterday’s losers can often turn around dramatically during the early stages of a recovery. You only have to look at the difference in the performance of UK equities over 2020 and then YTD in 2021 for proof of that.
The actual experience, however, highlights that we can be far too quick to dismiss poorly performing sectors or asset classes that are going through a phase of poor performance and into those that have performed well and potentially past their peak.
The flip side of this could also be true. It may be possible to time the market so that you miss the bottom 20 days, which would limit your downside but is it worth taking the risk?