The best way to ride the highs and lows of life as an investor is to have a plan and stick to it. Know your longer-term goals and set aside regular amounts each week to invest. Automate your plan and forget about it.
Jumping in and out of the market will probably have a negative impact on your returns
While in theory, it is possible to time the market – to sell just before prices go down and buy back just before they rise – in practice, it’s almost impossible to do so and you’ll lose lots of sleep!
Selling up and being out of the market can be extremely costly too. For instance, if you invested in the stock market (FTSE All-World GBP) from 2008 through to the end of 2019 and never sold a share, you’d have made an average return of 9.3% per year. Your £1,000 would become £2,915.
However, if you tried to ‘time the market’ you might have missed the ten best trading days during that same period, and your average return would have fallen to 3.85%. If you had missed the top 30 trading days your return would have collapsed to a loss of-2.11%!
Even though your instincts would tell you otherwise, getting out of the market can be the costliest mistake of all. A JP Morgan study found that 6 of the 10 best days in the market over the last 20 years occurred within 2 weeks of the 10 worst days**.
Benefit from pound-cost averaging
Regular investing each week or month, no matter what the state of the market, will teach you a non-emotional approach. You’ll buy low, high and everything in between. You’ll capture the average return of the market – about 7% historically*, which over time could lead to you doubling your money about once every decade. All you have to do is keep a lid on your emotions, and keep going!
Quiz: As an investor, should I…?
- Believe what I read in the news and pick the best day to invest my money in the stock market.
- Invest a regular amount each week so I buy high, buy low and everything in between.
- Jump in and out of the stock market to avoid losing my money.
Have you got your weekly deposit set up? That way you can automate your saving and investing and forget about it.
*MSCI Developed Equity Markets with after-tax dividends reinvested, priced in GBP. December 1969-June 2016
**In the S&P 500 Total Return Index
Quiz answer: 2
Remember, past performance is not a reliable guide to future performance. All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest.