It’s time in the market, not timing the market, that reaps rewards
Given current Brexit concerns and global economic uncertainty, we hear many people ask whether this is a bad time to invest. The simple answer is that it is not so simple! Generally, the most sensible approach is to invest for the long-term rather than wait on the side-lines for the ‘right time’.
The risks of trying to time the market
It is impossible to consistently predict market movements; even experienced investors cannot always get this right. There is also the risk of missing out, as certain days in a market cycle can make a significant difference to returns. For example, if you had invested £10,000 in the FTSE All-Share index for the full ten-year period up to 31 December 2018, you would have earned a profit of £4,754. But if you missed the five best days, returns would fall to £3,764, and again to £2,081 if the ten best days were missed. Meanwhile, being out of the market on the best 20 and 30 days would have brought respective losses of £132 and £1,896.
Staying invested when markets fluctuate may feel uncomfortable, but this discipline usually produces better returns over the longer term than chasing short-term gains.
Investment performance: The bigger picture
It is common to remember extreme market highs and lows without looking at the overall picture. Most will be aware of 1987’s ‘Black Monday’ global stock market crash, for example, without realising that investors in the FTSE All-share index actually realised a 4% return over the year.
While the focus also tends to be on share market performance, wise investors will never have all their interests in one asset class (e.g. equities) nor in one geographical region. So when we hear about shocks in one share market, this overplays the actual impact on most investors.
The importance of diversification
Even patient investors are unlikely to benefit from an ill-fitting portfolio that does not meet their needs or is overly concentrated in one area. The best strategy for minimising risk is to spread investments across a range of different asset classes, geographical regions and market sectors. Diversification gives your portfolio the chance to produce positive returns over time without being vulnerable to any single area or stock under-performing.
Choosing an adviser who uses a dynamic ‘multi-manager’ approach can help increase diversification, reducing reliance on any one fund manager making the right decisions in all market conditions.
Establishing a suitable investment approach
Before investing, it is crucial to assess your situation, income requirements, goals and timeline alongside your appetite for risk. This is best done objectively by an experienced professional who can then build a diversified portfolio with the right balance of risk/return for your peace of mind. Your arrangements should also be structured as tax-efficiently as possible for your life in Spain. Talk to a locally based adviser with cross-border experience to make the most of available opportunities.
If today’s climate still makes you nervous, you could consider spreading the timing of investments through ‘pound (or euro/dollar) cost averaging’. This can help smooth out volatility and potentially improve average returns over longer time periods. You could also explore multi-currency arrangements that minimise exchange rate risk by allowing you to invest and make withdrawals in your preferred currency.
Ultimately, a long-term, diversified investment approach is vital to help protect and grow your capital, whatever the economic climate. While a ‘keep calm and stay invested’ approach usually gives the best overall results, make sure you still review your planning once a year, or sooner if your circumstances change, to continue meeting your long-term financial goals.
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.