Trying to time the market is a very risky strategy

David Hill INLT 45-099-PSB
David Hill INLT 45-099-PSB

The shaky start suffered by stock markets in 2016 has prompted a few vocal commentators to call for panic selling, and moving everything to cash or secure bonds.

bonds.

This reaction is common enough, given human nature, but the problem is that it is a reaction, and successful investors are proactive, not reactive.

Fear and greed drive investment markets, and Warren Buffet, the well known American investor, famously said that he is fearful when others are greedy and he is greedy when others are fearful. Indeed, some commentators have said that one of the best indicators to buy shares is when the tabloids are urging to sell!

While I wouldn’t quite go that far, it is much more important to focus on spending time in the investment markets rather than trying to time the markets. Data between the end of the second world war up to the dot.com bubble bursting shows that a one-off investment of £100 would have grown to over £86,000 if invested in the UK stock market index. The same investment in building society accounts would have come to less than £3,000 over that time.

More recent data, published last week by investment firm Fidelity, shows that £100 invested in the FTSE share index 30 years ago would now be worth almost £1,500. However, if the best 10 days over the last 30 years were missed by being invested in cash, then the investment would only be worth £781: almost half as much.

Typically, the best days follow very quickly after market falls, and those who are trying to time the market simply miss out.

Now, having a balanced investment portfolio with a portion invested in shares should provide a good potential return over the long term. The secret is having sufficient cash accounts for any short term spending needs so that the investment can be left alone to grow.

David Hill is a Chartered Financial Planner and Trust & Estate practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: david@hillsfinancialplanning.co.uk