I’ve been investing in the UK stock market for longer than I can remember. I’ve learnt many lessons along the way. One of the most powerful ones has been the importance of staying invested for the long term. This is valid for several reasons, but one in particular. Staying invested allows you to not worry about having to perfectly time the market. In fact, being active can actually reduce your annual returns if you miss out on just a few of the best trading days. Let me explain.
Timing the market
I think we all know that perfectly timing the UK stock market is almost impossible to consistently get right. Timing the market is a wonderful thing if executed correctly. Take the stock market crash in March of last year. If I’d invested in a FTSE 100 tracker, I could have sold out a month before the low on February 14 with the index at 7,400 points. Then I could have bought the tracker again a month later on March 13 at around 5,366 points. I would have banked my profit, and been able to buy back over 25% lower!
From that angle, trying to time the market looks appealing. The reality though is that it’s incredibly hard to get right. In my above example, although there was global concern brewing over Covid-19, it wasn’t obvious the UK stock market was going to tank. If I’d sold and the market had continued to rally, I’d have missed out from not staying invested.
Adding numbers help to make the point clearer. If I’d invested for the past 30 years in a blend of FTSE stocks and never sold, my annual return would be 11.6%. Now if I had tried to time the market by buying and selling, and was sitting in cash for the 10 best trading days, my return would drop to 9.6%. Missing out on just 10 days cost me 2% a year for 30 years! If this was extended to missing the best 30 days, I’d be down to 7% a year. In monetary terms, if my starting investment size was £1,000, I’d have lost out on around £19,000 worth of potential profit.
Lessons from the UK stock market
To me, these numbers tell me several things. Firstly, that a long-term investment in the UK stock market can yield me strong returns (7%-11% a year). Secondly, that I don’t have to miss out on much in order to seriously eat into my returns. Finally, when looking at investments over several decades, that money lost can really start to add up.
To caveat my argument, I haven’t looked at the amount I would have saved myself if I’d sold and sat in cash for the 10 worst trading days over this period. No doubt I would have saved a lot. But in the same way, as I can’t predict the best days, I can’t predict the worst. How would I know when to sell to avoid these days? Overall, I feel the opportunity cost of not being invested is simply too costly to allow me to try and time the market.
I’ll carry on buying and holding shares I really believe in for the long term!