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YOU HAVE TO BE IN IT TO WIN IT

Mar 10, 2008

Although market volatility has left many investors rightly concerned on how they should weather the storm, research from JPMorgan Asset Management reveals that a knee-jerk ‘withdrawal and wait’ strategy could have severely detrimental effects on longer term returns, resulting in investors locking in their losses and missing out on subsequent market rebounds. 

Time - not timing
In times of market uncertainty, it is natural for investors to become nervous and lose sight of their long-term investment goals, postponing new investment or even selling their current holdings with the aim of reinvesting when the stock market stabilises.  However it is the time invested in a market – not the time you invest which ultimately determines returns.

To paint a clearer picture, investors who remained fully invested in the market over the last five years would have received returns of 60%.  In contrast, by not taking this long-term view, investors who missed out on the ten best days would have seen their returns cut to just 40%, while those who missed the best 40 days would have made just 4%.  . 

The table below illustrates the effect of being out of the UK, US and Global markets on the best 10 and 40 days:

Mike Parsons, Head of UK Distributor Sales at JPMorgan Asset Management commented:   “Time, and not timing is the key to successful investing.  Naturally, all investors would like to be able to predict the movements of the market - buying at the bottom and selling at the top.  Getting this wrong, however, can significantly affect the performance of investments and consequently, investor returns.  However tempting it might be to ‘follow the crowd’ and sell at the first signs of a downturn, investors who are in for the long haul and remain committed to riding out the turbulence will ultimately reap the rewards in the end.” 

Keeping the ‘Equities’ faith
It is important to remember that equity investing makes sense for the long term.  Over the past 25 years, equity markets have weathered fluctuating conditions to deliver strong returns, significantly out-performing bonds and building society deposits.  Although investors can expect a higher level of risk and greater levels of volatility, any sharp falls have historically been followed by sharp gains and holding a well diversified equities portfolio has proved to be the best way to grow capital.   

Turning market volatility to your advantage
In the current climate, investors should consider adopting a strategy that maximises the opportunity for ‘volitability’ - profitability from volatility.  Investors who, understandably, may have reservations about investing new money into the equities markets, can in fact make volatility work in their favour by ‘drip-feeding’ the market.

Parsons continues: “Investing smaller instalments on a monthly basis into a fund as opposed to a single large lump sum reduces the need for perfect timing, and means that the risk of investing everything when the market is at its peak is removed.  In a month in which the market falls, you will get more shares for your money.  If the market rises, you will of course purchase fewer shares, but your existing shares will also be worth more.”

 “We fully appreciate that investors can become concerned when markets fall, but, if they are worried about where to invest we recommend they to speak to an adviser and take positive measures to ensure that their portfolio is well balanced and diversified, rendering themselves best equipped to survive this unpredictable market climate.”