Time in the Market vs Timing the Market
Updated: Apr 10
A key part of receiving regulated financial advice regarding your investments and pensions is increasing your own understanding of how financial markets can benefit you and recognising what a typical investment journey looks like. When it comes to investing is time in the market better than timing the market? How long you are prepared to leave your money in the markets can have a significant impact on your returns.
When it comes to investing, you might have heard that time in the market is better than timing the market.
Time in the market is another way of describing long-term investing. Investors with a time horizon of at least five years (and in many cases longer) buy an asset and hold on to it. They tend to invest with a goal in mind. A good example is someone saving towards retirement which, depending on the stage of their career, could be 20 years or more in the future.
On the other hand, investors who try to time the market buy an asset when the price seems low and aim to sell it once they believe the price has peaked. That means they typically trade more frequently and hold on to their investments for a much shorter period.
Patience is a virtue
How long you are prepared to leave your money in the markets can have a significant impact on your returns. Returns can become more reliable the longer you hold your investments, especially for a period of 10 years and beyond. To put this into context, take a look at the chart below which covers the performance of the FTSE All Share Index since 2007.
As the top (dark blue) line shows, if you invested £1,000 in February 2007, it would have risen in value to £2137 by February 2022. Even though annual returns were positive most years, on some occasions they were negative. But by staying in the market, you would have earned a substantial return on your investment.
The bottom (light blue) line tells a different story. It shows your returns on that £1,000 investment if you missed the ten days when the FTSE All Share enjoyed its strongest performance. This is entirely possible if you had tried to time the market, which is notoriously difficult to predict over any time frame, even for seasoned investment professionals. As you can see, your returns over the same period would be nearly 50% lower.
Source: Bloomberg, using FTSE All Share Total Return in GBP, assuming £1000 invested on 26th February 2007. Chart shows return to 28th February 2022
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.