Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Why Freedom Day has been such a dud on the markets
It is often said that it is better to travel than arrive when it comes to investing and England’s ‘Freedom Day’ seems to be a case in point.
The long-awaited lifting of restrictions has come against the backdrop of rising infections and the FTSE 100 plunged to a two-month low on the day itself (19 Jul).
The surge in reopening plays which began with the successful development of a Covid vaccine in November 2020 is starting to feel like a distant memory just as those businesses are legally able to fully reopen.
In this week’s news section, we have a fuller analysis of the recent performance of these stocks.
The emergence of the Delta variant and the subsequent surge in infections is obviously a big part of this story but it is also true that by the time we get to an event which the market has long been factoring in, most of the good money has been made.
What can investors learn from this? Some may take the view they just need to be more agile and look to sharpen up their timing in order to make bigger profits from the stock market.
For most of us, this is almost certainly the wrong lesson to draw. Time in – not timing – the market is a more reliable route to protecting and increasing your wealth.
Research by Schroders (SDR) shows that if you had invested £1,000 in the FTSE 250 mid cap index at the start of 1986, by January 2021 that investment would have been worth £43,595 if you left it alone.
However, if you missed out on the best 30 days the same investment would now be worth just £10,627 and missing the best 10 days would still have cost you the best part of £20,000.
Nick Kirrage, a fund manager on the Schroders value investing team, said: ‘You would have been a pretty unlucky investor to have missed the 30 best days in 35 years of investing, but the figures make a point: trying to time the market can be very, very costly.
‘As investors we are often too emotional about the decisions we make. When markets dive, too many investors panic and sell; when shares have had a good spell, too many investors go on a buying spree.’
If you had been dipping in and out of the market, then missing the best 10 days is a perfectly reasonable scenario. It is better to stick with a disciplined approach of investing regular amounts in the market.
For those who are close to needing to crystallise at least some of their investments, perhaps because they are nearing retirement, a sensible approach would be to gradually reduce the component of their portfolio which is exposed to stock market volatility.