Successful investing is a marathon, not a sprint. When markets fluctuate, it can be tempting to buy and sell investments to avoid losses or chase short-term gains, but this will rarely help meet your longer-term financial goals.
When you examine a long-term stock market chart, the upward trajectory is typically clear. While some short-term fluctuations are inevitable as markets respond to global events, zooming out reveals a consistent pattern of recovery and growth, with markets typically rebounding and reaching new highs over time.
Avoid emotional investing
Emotions play a part of all aspects of life and can be one of the biggest obstacles to investment success. Fear, greed and uncertainty can lead to poor decisions, like selling at the bottom or waiting too long to invest. These reactions are understandable but can come at a cost.
You may have seen an investment chart illustrating ‘the cycle of human emotions’. These range from optimism to euphoria, before curving down to panic and capitulation – but then they rise through hope and relief back to optimism.
It’s easy to get caught up in euphoria as markets peak, but this is the point of maximum financial risk and often the worst time to buy. Conversely, investors who give into fear as prices fall can exit the market at what turned out to have been the worst time to sell. Missing the rebound that inevitably follows means they locked in the losses. Likewise, those waiting to invest miss the point of maximum opportunity.
By understanding the emotional cycle of investing and committing to a disciplined strategy, you can avoid common pitfalls and stay aligned with your financial objectives.
Risks of trying to time the market
For individual investors, it is extremely difficult to anticipate the wide range and speed of events which can impact economies and markets. At any time, external events, investor sentiment and rumours can have a negative or positive impact. Market falls can be sudden – but so can upswings.
Reacting to current conditions is usually too late. You would need to foresee both the best time to buy and to sell, and even experienced investors cannot get this right all the time.
Then there is the risk of missing out. It is surprising what a difference certain days in a market cycle can make to returns. If you wait for share prices to stabilise before investing, you could miss benefiting from the rebound days if the market suddenly rallies.
To illustrate this, if you had invested £100,000 in the FTSE All-Share index for the full 10-year period up to December 31, 2024, and stayed invested the whole time, you would have enjoyed a profit of £81,930, before fees and charges are applied. Investors who missed just the five and 10 best days saw profits drop to £41,128 and £10,996 respectively. Those who missed the 20 and 30 best days saw losses of £9,210 and £20,902 respectively over this 10-year period (all before fees and charges).
Waiting to invest
We often come across people who intend to invest for the long-term but are holding onto available capital. They’re waiting for external events to unfold first to feel more positive that they won’t suffer losses.
Waiting for the perfect time to invest is effectively trying to time the market. You may not be rewarded for your due diligence and end up with lower overall returns.
If you are particularly cautious, consider the ‘pound cost averaging’ approach which can help smooth volatility.
Follow a disciplined investment process:
- Establish your objectives and time horizon.
- Calculate your attitude to risk.
- Carefully construct a portfolio to suit your circumstances, goals and risk profile.
- Spread the risk over a range of assets and diversify across regions, sectors, companies, investment styles etc.
- Use quality investment managers.
- Hold your investments within a tax-efficient structure to maximise real returns.
- Be patient and stick to your long-term plan.
- Review your portfolio annually to rebalance as necessary or adjust if your circumstances have changed.
Investing is as much about mindset as it is about markets. While it’s natural to feel cautious during turbulent times, trying to time the market rarely works in your favour. Instead, focus on building a well-diversified portfolio that reflects your goals and risk tolerance, and stick with it. With the guidance of a trusted adviser and a long-term perspective, you can navigate uncertainty with confidence and give your savings the best chance to grow.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on individual circumstances; take individual personalised advice. The value of investments can fall as well as rise as can the income arising from them. Past performance should not be seen as an indication of future performance.
