Given the volatility experienced year-to-date compared with 2017, we continue to remind clients that market fluctuations are a necessary part of investing and that it is important to stick to your long-term investment plan.
The Cost of Market Timing (1995 to 2017)-1
Market fluctuations are an expected and necessary part of investing. The important thing is to stick to your long-term investment plan. This is easier said than done. It is useful to remember that when the market falls you still own the same assets; you are just paying less for them. Human psychology is odd: when cornflakes go on special we tend to take advantage and stock up, but when the stock market falls we become stressed.
Investors who attempt to time the market run the risk of missing periods of exceptional returns, leading to significant adverse effects on the ending value of a portfolio. The top graph illustrates the risk of attempting to time the stock market (FTSE/JSE All Share Index) between July 1995 and December 2017 by showing the returns investors would have achieved if they had missed some of the best days in the market. The bottom graph illustrates the daily returns for all 5,639 trading days.
Investors who stayed in the market for all 5,639 trading days achieved a compound annual return of 14.9%. However, that same investment would have returned only 8.4% had it missed only the 25 best days of stock returns. Further, missing the 50 best days would have produced a below-inflation return of 4.2%.
Although the market has exhibited tremendous volatility on a daily basis, over the long term, stock investors who stayed the course have been rewarded accordingly. The appeal of market timing is obvious—improving portfolio returns by avoiding periods of poor performance. However, timing the market consistently is extremely difficult. And unsuccessful market timing, the more likely result, can lead to a significant opportunity loss.
Source: Morningstar Investment Management