Look ahead to better your chances

In this penultimate article of our investment fundamentals series, we look at the temptation many investors feel to try to beat the market by selling investments when share prices go down, with the intention of buying again when they start to rise. Equally, some investors delay making an investment until they feel more confident that prices are going up.

In theory, 'market timing,' as this is known, is attractive. But in practice, it is rarely successful.

Too easy to miss

Just as the big falls in stock markets tend to be concentrated in short periods, the best rises happen quickly. And since these large gains often occur in the early days of an upward trend, an investor trying to time the market is highly likely to missout.

We looked at the returns from the global stock market and an index made up of the major markets in the Middle East and Africa over the last 15 years. Our analysis shows that missing just a few of the best days can be significant.

Missing the ten days over this period would have significantly reduced your returns, cutting the Middle East and Africa growth from 14.46 per cent per year to 10.40 per cent. Similarly, your return from the global market would have dropped from 7.47 per cent per year to 4.91 per cent if you hadn't stayed invested throughout (see table 1). If you had missed more days, the difference would be even more significant. So, far from minimising investment risk, market timing seems to be a high-risk strategy.

Time factor

It's clear that worrying over when to invest makes very little difference over the long term. What matters is the length of the time you invest for, not exactly when you invest. In our next article, we look at a great way to invest in the stock market, through both the ups and downs.

Our experts, together with Fidelity research network, examined the performance of the global stock market and combined Middle East and Africa index since April 30, 1992.

Over this time, there were 869 possible 10-year periods, each starting one day apart. Looking at each of these, no investor taking a 10-year view would have made a loss (see table 2). Investors who put their money aside for a shorter period might have lost money.

The bottom line - the longer you stay invested, the better the chances that your investment will grow.

- The writer is director (sales), Fidelity International, Dubai.