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Trusting in the long term, not timing for the short termApril 30th 2009 Wise investing where there is successful stockmarket investing, invariably there is a common theme – that is, time in is the key to success, not timing. The accumulated wisdom of history shows that stockmarkets tend to rise in value over the long term. Yet trying to time buying and selling stockmarket exposure is fraught with difficulty. Market movements from one day to the next are notoriously hard to predict. You can end up simply missing rallies and crystallising losses. At times of uncertainty, such as now, the dangers of market timing are greater than ever. It’s natural to be anxious following falls in the value of stockmarkets, and there’s often a temptation to sell to avoid further declines in wealth. Experience shows, however, that it is at times like this that stockmarkets are at their least expensive. Consequently, when confidence returns to markets there can be huge rallies. Looking back 15 years The past 15 years clearly show the power of long-term investing and the dangers of market timing. If an investor had, for example, invested in the FTSE All-Share stockmarket index in August 1993, the investment would have generated a return of 205.48% – more than twice the original investment. In contrast, if the same investor had traded in and out of the market and, as a result, missed just the 10 best rallies during the period, the return would have halved. Missing more rallies would have eroded returns still further, as the table below shows, and the same lessons apply across world markets. Times of uncertainty are precisely when market rallies can be most powerful. Some of the biggest market rises have occurred when markets have been at their most volatile. Sudden items of positive news have sparked substantial bounce backs. Within this 15-year study period, there have been three pronounced stockmarket declines, excluding the current credit crisis. 1. Following the 11 September 2001 terrorist attack in New York, the FTSE 100 recovered within three weeks. 2. In the Russian debt default of August 1998, there were concerns of a global financial crisis, yet the FTSE 100 index rallied back to its original level by the end of November. 3. The recovery that followed the bursting of the technology bubble in spring 2000 took far longer, but the FTSE 100 did regain its previous heights eventually by mid 2005. Lessons for today Of course, this is not to say that no positive action can be taken when stockmarkets are low. Fund managers often take advantage of times like these to buy into quality companies that are suddenly selling at far cheaper valuations. Opportunities such as these can form the foundations for long-term returns. So, while no-one can predict with any certainty how the current credit crisis will play out, you can be sure that successful investing requires a long-term approach. Attempting to time the market is tempting but this view runs contrary to the lessons learnt from decades of stockmarket history. The wisdom of long-term investing The table shows the returns gained from sustained long-term stockmarket investing and the risk that short-term market timing may miss market rallies. 15-year performance of major stockmarket indices % growth
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