Why Timing the Market Will Achieve Strong Returns
By Dale Gillham | Published 17 December 2019
Boris Johnson and his conservative party were re-elected in a landslide victory last weekend that will now see the UK be the first country to exit the European Union (EU), which will occur by the end of January 2020.
The London stock exchange has pretty much been in a holding pattern for quite some time given that it is currently only up around 3 percent in the last four years, and around 9 percent in the past six years. Consequently, with the UK exiting the EU, I don’t believe it will have a negative effect on the FTSE.
The reason for this is that the world has known for ages that the UK would most likely be exiting the EU eventually, and so all concerned would have been planning for this to occur.
In other world news, the US and China have reached a phase one deal that averted an escalation of the trade war with higher tariffs that were set to kick in on Sunday. In a tweet, President Trump said: "They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods,". He added that existing tariffs will remain in place though, but that the "penalty tariffs" will not be imposed.
With Brexit becoming a reality and the US, and China getting closer to a deal, 2020 is shaping up to be a very good year in world markets. That said, given what has unfolded over the last few years, it really highlights why time in the market is not the best investment strategy. Let me explain.
If you invested $1,000 in the US S&P 500 on 1 January 1950 and held it until today, which is around 70 years, your investment would be worth $187,000 excluding any income from dividends or fees that you may have paid. While this is impressive, the law of compounding suggests that most of the gain occurs in the last few years, which is no exception in this case.
That’s because the gain between 1 January 1950 and 1 January 2010 was only $73,958. But the growth in capital from $73,958 to today where it is now worth $187,000 occurred in the last 10 years. That’s growth of around 253 percent, which is not that surprising given the strong bull run of the S&P 500 over the last 10 years.
But if we look at the growth of that $1,000 invested from 1 January 1990 until today, which is a period of 30 years, it would only be worth around $9,000, which is not that spectacular. That’s because during that time your money would have been subjected to at least two long bull runs, but you would have also had to suffer the market decline in 2002 due to the tech wreck and the GFC, all of which decimated returns.
If we consider a shorter time frame, and assume you invested that $1,000 on 1 January 2000, then 20 years later it would be worth around $2,167, which again is not that exciting. But if you invested $1,000 on 1 January 2010, then 10 years later it would be worth $2,854 because while the time frame is halved, you haven’t been subjected to a bear market, which in my book is the key to achieving better returns.
Think about it, if you only invest when the market is rising and exit when it is going sideways or down, it stands to reason that your capital will grow exponentially. Being a little more active in managing your portfolio by timing the market will support you in building a quality nest egg for retirement.
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