The cost of trying to time the UK market

‘Buy low, sell high’ – that’s every investor’s goal. However, it’s easier said than done.

In practice timing the market is notoriously difficult. It can also be costly. This is why, at Schroders Personal Wealth (SPW), our principles include spending time in the market and investing for the long term. Research from Schroder Investment Management (SIM) highlights potential losses if your attempts to time market highs and lows go wrong.

This month has seen market volatility due the collapse of Silicon Valley Bank, troubles at Credit Suisse, high inflation and interest rate rises. But it is just one recent instance of volatility. The drop in share prices at the onset of the pandemic in 2020 – and the strong recovery since – is another dramatic example.

Time in the market – not timing the market

Over 34 years, mistimed decisions on an investment of just £1,000 could have cost you slightly more than £12,000-worth of returns if you’d invested in large UK companies.

SIM research examined the performance of several major stock market indices, which attempt to measure the performance of various UK and US markets. These included indices for the following:

• 100 largest UK companies (the large cap UK index in the table)

• 250 next largest UK companies (the mid cap UK index)

• All UK companies (all UK companies index)

• 500 largest US companies (the large cap US index)

How it plays out with UK stocks

If in January 1988 you had invested £1,000 in the equities (shares) of the 100 largest UK companies (the large cap index) and left the investment alone for the next 34 years, it might have been worth £15,104 by June 2022 (bear in mind, of course, that past performance is no guarantee of future returns).

But the outcome would have been very different if you had tried to time your entry in and out of the market.

During the same period, if you missed out on the UK large cap index’s 30 best days the same investment might now be worth £3,100, or £12,004 less – not adjusted for the effect of charges or inflation.

If you missed only the 10 best days you would still lose out substantially: you would end up with just £7,503, less than half of the outcome had you remained invested and captured the growth of those 10 top days.

Over the last 34 years your original £1,000 investment in the UK large cap index could have made:

• 8.31 per cent a year if you stayed invested the whole time

• 6.10 per cent a year if you missed the 10 best days

• 4.66 per cent a year if you missed the 20 best days

• 3.38 per cent a year if you missed the 30 best days

The table below shows what the £1,000 would have been worth in June 2022 under these various scenarios.

What a £1,000/$1,000 sum invested in 1988 could be worth now

Source: SIM, Refinitiv, 23 August 2022. Total returns between 4 January 1988 and 30 June 2022. Past performance is not a reliable indicator of future results.

How it plays out with US stocks

SPW is a global investor and has larger holdings in US equities than in UK equities, as the US stock market is much bigger than the UK stock market. For this reason, I also consider the impact of missing out on the best days for US equities. And I show the returns in dollars, to remove the impact of currency fluctuations. Significantly, overall returns since 1988 were higher for US equities than for UK equities and the potential loss of missing out on best days was even greater.

If in January 1988 you had invested $1,000 in the US large cap index and left the investment alone for the next 34 years, it might have been worth $31,223 by June 2022 (see table above; once again, past performance is no guarantee of future returns).

During the same period, if you missed out on the index’s 30 best days the same investment might now be worth $5,366, or $25,857 less – not adjusted for the effect of charges or inflation.

Over the last 34 years your original $1,000 investment in the US large cap index could have made:

• 10.65 per cent a year if you stayed invested the whole time

• 8.13 per cent a year if you missed the 10 best days

• 6.47 per cent a year if you missed the 20 best days

• 5.06 per cent a year if you missed the 30 best days

When observing returns over long periods, investors should also bear in mind that markets can be volatile, with many fluctuations up and down during the timespan.

Stick to a financial plan

Nick Kirrage, a fund manager in the SIM value investing team, said: ‘You would have been a pretty unlucky investor to have missed the 30 best days in 35 years of investing, but the figures make a point: trying to time the market can be very, very costly.

‘As investors we are often too emotional about the decisions we make: when markets dive, too many investors panic and sell; when shares have had a good spell, too many investors go on a buying spree.

‘At times over the last three decades you would have to have had nerves of steel as an investor.

‘They have included some monumental stock market crashes including Black Monday in 1987, the bursting of the dotcom bubble at the turn of millennium and the financial crisis in 2008, to name but three.

‘The irony is that historically many of the stock market’s best periods have tended to follow some of the worst days.

‘It’s important to have a plan of how long you plan to stay invested, with that plan matching the goals of what you’re trying to achieve, be it money for retirement or your children’s university education. Then it’s just a matter of sticking to it – don’t let unchecked emotions derail your plans.’

A good financial adviser can help create a financial plan that’s right for your circumstances. They can also help identify the right investments to help you potentially reach your financial goals.