What happens if you get your timing wrong?

10 April 2019

Savers who are put off investing by current global political and economic worries can learn some lessons from the past.

Making the decision to invest your money can often be a tough one. There is always the worry that you will be the unlucky one, investing your money one day, only to see stock markets fall significantly in the days or weeks immediately after.

It’s the reason many shy away from investing at all. After all, behavioural scientists reckon the psychological pain of losing money is about twice as powerful as the pleasure of gaining.

Indeed, the last 30 years or so have included some of the biggest stock market crashes in history – providing plenty of shocks that might have put people off investing. With the US/China trade war unresolved, and the huge uncertainty about the UK’s exit from the European Union at the end of March, who knows when or what the next market shock will be?

Of course, the alternative to investing is to remain in cash, perhaps waiting for the ‘perfect’ time to invest. There is no perfect time to put money into the stock market, and the risk of holding out for one is that savers remain in cash forever, harming their personal wealth for decades to come.

So, what has happened in the past when investors have picked what looked like the worst time to commit money to the stock market?

The Black Monday crash of October 1987 saw the FTSE All Share index drop 23% in two days; the fastest and biggest fall in history. The market eventually dropped nearly 34% before staging a recovery. Yet, an investor who put ￡100,000 into the market just before the crash would have seen their money grow to ￡318,000 in the decade that followed. As the chart shows, they would have grown the real value of their money significantly; the fundamental reason why we need to invest.

Source: Financial Express. Data for the FTSE All Share index and RPI/CPI from 30/9/1987 to 30/9/1997.

Similarly, the Global Financial Crisis saw the UK stock market fall over 41% between October 2007 and February 2009. What would that have meant for an investor who ‘got their timing wrong’? Over the next decade, an investment of ￡100,000 in the UK stock market would have returned ￡171,000, comfortably beating inflation despite that terrible start.

Source: Financial Express. Data for the FTSE All Share index and CPI from 31/10/2007 to 31/10/2017.

Bringing the picture up to date puts these events into a long-term context and shows how investors have been rewarded for holding their nerve.

Source: Financial Express. Data for the FTSE All Share index and RPI/CPI from 30/09/1987 to 31/01/2019. 

These two examples prove the value of the adage that it is time-in, not timing, the market that really matters. One other way to reduce the worry of investing at the wrong time is to drip-feed your money into the market on a regular basis. You can do this through a savings plan or by automating the transfer of funds from cash into the stock market over a number of months.

“To create real wealth, you need to take some measured risk, and you need to allow your investment time to weather the peaks and troughs of stock markets,” said Rob Gardner, Director of Investment Management at St. James’s Place. “We don‘t know whether Brexit or some other event will present the next challenge to markets, and some investors might therefore be tempted to adopt a ‘wait and see’ approach. But as previous market events illustrate, what might feel the worst time to invest is still likely to prove a better long-term decision than leaving your money in cash, due to the eroding effects of inflation.”

Please be aware that past performance is not indicative of future performance. The value of an investment may fall as well as rise. Returns on equities cannot be guaranteed. Equities do not provide the security of capital characteristic of a deposit with a bank or building society.

FTSE International Limited (“FTSE”) ? FTSE 2019. “FTSE?” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

https://www.finance-monthly.com/2017/10/black-monday-1987-in-numbers/

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