‘Time in the Market vs Timing the Market’: A Guide to Long-Term Wealth for New Investors
‘Timing the market is more of a threat than time in the market’. This is core to any investor wanting to start a journey that will deliver long-term results without the burden of continuous monitoring. This can even be the case in the current volatile times across investment markets around the world. Keen and new investors could be forgiven for thinking if ‘now or later’ is the right time to jump in and start their journey.
Relief for new investors is that history has shown that markets have consistently grown over time. From 1957 to the present, annual returns from the S&P 500 (top 500 large companies listed on stock exchanges in the U.S.) have circled around the 8% mark. Over this period, this market and many others have experienced ‘highs’ (bull markets) and ‘lows’ (bear markets), but, if investors are willing to ride this rollercoaster, they can expect solid returns over prospective investors who cherry-pick and attempt to time the market.
It is also important to note that different assets provide different returns from year to year. Having capital spread across a range of assets will diversify an investor’s portfolio – reducing their risk to downfalls and exposing them to potential returns across a range of assets.
Building from Returns
Direct shares and managed funds pay regular dividends which generate gross income for the shareholder. By reinvesting this, and making additional contributions into the market, steady market growth and upward returns are likely to yield strong earnings.
The 2020 Vanguard Index showed that a $10,000 investment into Australian shares in 1990 created 8.9% return per annum up until 2020. This was the case with reinvestments into all distribution channels and by 30 June 2020, the value of the portfolio reached $130,000.
Source: 1: Vanguard Index Chart (1 July 1990 to 30 June 2020)
This same strategy was also applied to the U.S. share market and returns of 10.3% per annum were calculated to have grossed a portfolio worth over $185,000.
Any amount can be used to lay the foundation of growth – there is no minimum. Any investment, no matter how low, will grow considerably especially when paired with continuous investments over time.
A strategy to expand the value of the portfolio even greater is through regular investments at set intervals over a prolonged period. This is known as the dollar-cost averaging strategy. From utilising this strategy, the cost of investment is averaged out, irrespective of where the price of the share is higher or lower than the initial purchase price. Results of this can be seen in the figure below.
Source 2: Andex Charts Pty Ltd. Data based on annualised returns since 1990.
Investing in the long-term also lessens the burden of transaction costs that are incurred when investments are bought and sold. As long-term investments are held longer, investors are incur fewer transaction costs.
Also, long-term investment may provide tax benefits, through the minimising of the capital gains tax (CGT). The more often assets are sold (provided profit is made on them) the taxes that are payable on these assets can accumulate over time.
It can then be said that it is never too late, or too early, to start constructing and building one’s portfolio; no matter the individual’s age.
Key to diligent investing is not attempting to cherry-pick and ‘time the market’, but instead, spend ‘time in the market’ and ride the historical wave of unhurried, but continuous growth. The earlier one begins their investment journey, the more funds will be accumulated when the time comes to stop work.
Advisers can assist in any type of investor in order to achieve their long- or short-term goals by recommending appropriate investments, and recommending strategies that can reduce long-term costs.