Riding the ups and downs of the market can be uncomfortable and confusing, especially for first-time investors. But it’s important to remember the investing principle of Warren Buffett, the world’s most successful investor: It’s time in the market, not timing the market that is the key to success.
Short-term vs long-term investing
What the graph below illustrates is that in the short-term the stock market can be volatile (meaning the share price fluctuates a lot). When this happens you can be sure the news headlines will be talking about it.
This could make investing feel uncomfortable and risky but it’s important to keep it all in perspective. Setbacks only become losses if you sell your shares before they’ve had a chance to recover.
While past performance is no guarantee of future performance, if you look back at history, these headline-grabbing moments don’t look so bad, do they? You wouldn’t want to miss out on those long-term gains because you stepped out at the wrong time. As Warren Buffett says, “trying to time the market is the number one mistake to avoid.”
Corrections and crashes will happen
If you understand that corrections and crashes are going to happen, then you’re prepared, and you know what to expect. They have happened throughout history and despite this, the stock market has been the best place for the longer-term investor to grow their wealth. You just need to understand the risks, then manage yourself, stick with your plan and keep a lid on your emotions.
What you need to know about corrections:
- They’re a 10-20% fall in the stock market
- They happen once a year on average
- The average fall is 13.5%
- And the average duration is 54 days
What you need to know about a crash (also called a bear market):
- They’re a stock market fall of more than 20%
- They happen on average once every four years
- The average fall is 33%
- And the average duration is one year
Don’t forget, 80% of corrections do not turn into crashes. And while we can’t predict the future, so far 100% of crashes have been followed by a recovery that more than recovers the fall.
Your secret weapon
While people see risk as a reason not to invest, your secret weapon in managing this is time. The longer you leave your money invested, the higher the probability of it performing better than cash. Here’s a graph that shows the percentage of times during the last 116 years that shares have beaten cash when held for five, 10 and 18 consecutive years.**
Tune out of the short-term market fluctuations as much as you can. Know your time horizon– and as you’re investing for the longer-term (more than five years) then you can ride out the shorter-term highs and lows. Over the last 20 years (end of 1999 – end of 2019), the FTSE All-World GBP has averaged an annual return of 7.5%. The risk becomes less risky with time, the key is to not invest money that you may need to access in the short-term (like emergency funds or other expected costs over a 5-year period).
Today is the best day to invest in stocks – because the sooner you start, the sooner you’ll start benefiting. As you’ll see, the longer you’re invested, the higher the probability of you getting greater returns.
** Source: Equity Gilt Study 2015.