Time in the market beats timing the market. This well-known maxim encapsulates arguably the most important piece of investment advice – to stay invested. This is particularly timely given the current environment and recent drops in both equities and bonds. Evidence shows that remaining invested for the long term is one of the best things you can do for your overall wealth.
2022 has been a challenging year for stock markets with sizable declines seen in global equities as the highest level of inflation in a generation has caused central banks to raise interest rates at a rapid pace.
However, investors should maintain a long-term horizon and look through short-term headwinds. Staying invested allows you to benefit from the growth in businesses and the economy over time. While it can be tempting to take money out of the market in the short term, history shows it is highly likely to deliver lower returns overall.
Chart one: the impact of missing the best days in the market
Our first chart shows the negative impact of missing the best days in the market. While it might seem preferable to avoid bear markets, many of the largest daily gains occur during these periods. Missing these days by divesting into cash would have a clear and significant detrimental impact on your overall returns.
The bar on the left-hand side shows how much a £1m portfolio invested in UK shares (reinvesting dividends – see chart 2 below) at the start of the year 2000 would be worth now – it would have more than doubled. The bars to the right show how much your portfolio would be worth had you missed the best 10, 20 and 40 days in the market. Notice that the portfolio would have lost value during this period had you missed the best 20 or 40 days in the market.
Chart number two: The dividend difference
Dividends are payments made by companies to shareholders and can account for an extremely significant portion of long-term returns. Reinvesting these dividends allows them to compound and can provide a major increase to overall returns. For instance, reinvesting dividends can more than double the overall return, as has been the case for UK indices since the turn of the millennium.
The chart below shows the performance of £1,000 invested into UK shares and US $1,000 invested into global shares, with dividends reinvested or paid out from the end of December 1999 to the end of September 2022.
Critically, dividends are often paid at regular intervals and therefore if you try to time your entry in and out of markets, you may miss these payments. Missing dividend payments would have severely diminished your investment returns over the past 22 years – you would have received the returns shown above in blue, rather than the returns shown in orange.
In conclusion, there have been clear benefits to remaining invested over the past 40 years. Historical results should not be seen as a guarantee of future performance, but the rationale behind this approach is sound. Looking through short-term volatility and maintaining a long-term focus has proven to be a winning strategy, largely due to not missing the best days in the market and the reinvestment of dividends.