The importance of patience, discipline, and resilience – why time in the market beats timing the market

If you’ve spent much time with investors or financial planners, you may have heard the adage: “Time in the market beats timing the market.”

But what does this phrase really mean, and is it anything more than just an old cliché?

Perfectly timing your entry into or exit from the market – essentially “buying low and selling high” – can, in theory, lead to significant rewards. However, the likelihood of achieving this is low, and more often than not, trying to time the market can result in missed opportunities and greater risk.

Stock markets are notoriously unpredictable, and whether you’re chasing the latest trend or cutting your losses in a downturn, attempts to time the market can lead to missed opportunities and greater risk.

Long-term stock market growth, on the other hand, is typically reliable if you’re willing to be patient and ride out short-term fluctuations and downturns.

Read on to discover why “time in the market beats timing the market” is more than just a saying, and how embracing this approach – with the right diversification and regular portfolio reviews – could improve your investment success over the long term.

Mistimed decisions could cost you significantly

Trying to predict market performance and time your entry or exit can lead to missing out on the market’s best days, potentially causing you to miss out on significant gains.

Research by Schroders found that if you had invested just £1,000 in the FTSE 250 at the start of 1986 and left the investment alone for the next 35 years, it could have grown to £43,595 by January 2021.

However, had you attempted to time your entry into or exit from the market over the same period and missed some of the market’s best days in doing so, the outcome could have been very different.

Over those 35 years, if you missed out on just 30 of the best days, your £1,000 investment might now be worth £10,627 – a full £32,968 less than it would be if you had left it alone.

The table below shows the returns on £1,000 invested between 1986 and 2021 in the FTSE 100, the FTSE 250, and the FTSE All-Share. It shows the potential growth of the investment if it were held the whole time compared to missing out on the best 10, 20, and 30 days on those indices.

Source: Schroders

As you can see, missing just a few days could cost you considerably compared to maintaining your investment for the full period.

Exiting during market downturns or all-time highs has typically been a poor decision

During periods of market volatility or downturns, it can be tempting to sell your investments in an effort to cut your losses.

However, a decline in your portfolio’s value is only a paper loss until you actually sell. By staying invested, you give your portfolio the opportunity to recover, as markets have historically rebounded and trended toward long-term growth.

The graph below shows how average returns on the S&P 500 dropped into negative territory during several global crises since 1987, followed by strong rebounds over the subsequent 12 months.

Source: Forbes

If, for example, you chose to exit at the onset of the pandemic in 2020 as returns fell by more than 30%, you would have missed out on the potential to recover your losses the following year and make gains of 44%.

Similarly, you may be tempted to liquidate your investments during a market peak, assuming a dip is imminent.

However, further research by Schroders shows that returns are, on average, 1.7% higher in the year following an all-time high than they are at other times. Moreover, market highs happen more often than you might think, occurring in around 30% of months.

This suggests that, rather than trying to capitalise on a market peak and time your exit, it could be beneficial to view them as potential opportunities for growth in the months that follow.

So, whether you’re looking to cut your losses amid a downturn or reap your gains during a market high, switching to cash has typically been a poor decision compared to maintaining your investments.

This also speaks to the importance of building a fundamentally sound, diversified portfolio. A well-balanced portfolio tailored to your risk tolerance, regularly reviewed and adjusted when needed, is key to reducing risk and the effects of volatility and downturns, while also enabling you to capitalise on long-term growth opportunities.

Holding your investments over long time horizons improves your potential of achieving strong returns

Markets have historically trended toward growth over the long term. The longer you hold your investments, the greater your chances of experiencing strong returns and recovering from downturns.

A study by Nutmeg analysed global stock market data from January 1971 to July 2022. It found that if you had randomly chosen one day during this period to invest for just 24 hours, you would have had a 52.4% chance of making a gain.

However, if you had invested your money for any random quarter (65 trading days) during that same period, your likelihood of turning a profit would have risen to 65.6%. Investing for an entire year would have yielded a positive return 72.8% of the time, while holding your investment for 10 years would increase your chances of success to an impressive 94.2%.

The graph below outlines the results of Nutmeg’s research into the value of maintaining your investments in global markets over long time horizons.

Source: Nutmeg

As you can see, once you have held your investments for 12 years, the probability of achieving positive returns is nearly 100%.

This highlights the importance of a long-term investment strategy.

By staying invested, you position yourself to benefit from the historical upward trend of markets over time, allowing for recovery from losses and the potential for long-term gains.

So, even in the face of market dips and fluctuations, it could be a good idea to remain patient, resilient, and disciplined in your investment journey, as the long-term outlook is overwhelmingly favourable.

Get in touch

Staying focused on long-term goals can be challenging, especially during periods of downturn and volatility. A financial planner can offer valuable guidance and support, helping you navigate these turbulent times while strengthening your discipline to achieve your long-term objectives.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk 020 8296 1799.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.