Market timing – futile or shrewd?

Well, we have had another letter from our financial advisors.  I am guessing it is designed to address the stream of nervous phone calls from anxious investors, perhaps.  The letter again suggests sitting tight and not being too fazed at recent falls.

It is easy to focus on the falls, when we hear the dramatic headlines and we translate those into our own losses.

I remember one day, probably about twenty years ago and at a time when I used to keep a closer eye on things, our little pot of money had a real hit one day (I think something in Russia triggered it).  That day I saw the loss and realised it was a year’s salary for me, gone in a flash.  I was disturbed at that.

However, as we have seen very recently, dramatic falls can sometimes precede dramatic rises.  Monday 16th March, only a few weeks ago, saw the FTSE 100 rise by 9.1% in a day.

So to miss out on those rises seems a shame.  It is all too easy for people who become spooked by those falls to lose confidence and then cut their losses, selling in fear of preventing any further drops in price.

As you can see in the graph above, it shows what happens to a hypothetical investment of £1000.  If that investment ran the course there would be many drops, falls and crashes.  And yet through looking at the benefit of those gains, you can see over the longer term things work out fine.  Even missing out on one or two of those recoveries has a detrimental effect.

Naturally the occasional volatility which is likely to occur needs to be in line with what risk anyone is prepared to accept.  Investing is always going to entail a certain level of risk and we should always be mindful of the well known “the value of your investments can go down as well as up”.

However, keeping money in the form of cash has its risk as well, especially as interest rates are so pathetically low.  Combine this with clocking how cash deposit rates are way below the inflation rate, which in turn is already low and you see the risk.

So back to our advisors.  The essence of their advice is urging clients to sit tight, not over reacting and to remember how investments are structured for long term, steady growth.

My translation of that is holding our nerve, just let the experts get on with it and to be thankful for the resources we have and how they can work for good.