Keep Calm & Carry On. Sage advice in times of market stress.
Countless research has shown that missing just the best few days of returns in the market is enough to significantly dent your total investment return.
Research by Fidelity has shown that if you had your money invested in the FTSE All-Share from the end of June 2003 to the end of June 2018 (15 years or approximately 5500 days), you would have earned a very nice 8.9% annualised return. Not too bad by any standards.
If you miss just the best 10 days of performance (out of those 5500) then your total return falls to just 4.6% per annum.
Miss the best 20 days and it falls further still to only 2% per annum.
If you miss the best 40 days of returns (again to stress, out of a total of 5500) then you actually get a negative return of -2% per annum.
The same research has been replicated across many different markets all over the world and the results are very similar.
This shows the importance of remaining invested, even when markets get turbulent.
In this world where investment decisions are made by computers in milliseconds and the distance from the stock exchange determines which trading house wins, anyone who thinks that they can time the markets is either lying, deluded or both.
Research has also shown that so called ‘investment experts’ and analysts have a pretty much exactly 50% chance of success when trying to predict when markets will go up or down. You might as well flip a coin to predict the direction of tomorrows markets, it has as much chance of being right as anyone else out there.
Im pretty sure on Monday of this week no one predicted the falls we have seen on Wednesday and Thursday. If they did I am yet to hear about it.
The point is that markets move very quickly.
If you attempt to time the market, the chance of missing those best 10 days is very high indeed. Markets can and do recover quickly and the biggest gains (i.e. those best 10 or 20 days), tend to follow significant market falls.
We only have to look back as far as February to see a similar phenomenon in action. In the early days of the month, the S&P 500 dropped around 8-9% over just a couple of days. Of course this was widely reported in the media with the usual collection of colourful language such as ‘turmoil’, ‘chaos’, ‘panic’ and, my personal favourite, ‘bloodbath’.
What received almost zero mainstream media coverage was the subsequent recovery. Only weeks later the S&P 500 has recovered the 8-9% it lost and it then went on to break new record highs only a few weeks after that.
Calm seems to have returned this morning on the markets. Could this be the start of the next recovery, or just the eye of the storm?
The truth is that no-one knows, but the time-tested investing adage of ‘time in the market, not timing the markets’ is as valid today as it ever has been.
Keep Calm and Carry On. It’s the only way to invest.