The power of time

Written by Cherry Reynard, Consulting Editor

Investment requires, above all, a long-term view. Many of your goals – retirement, university education for your children – will also be long term. While it is tempting to be swayed by market news, selling in and out on the basis of fluctuations in economic or corporate growth, it tends to cost money and erode the real value of your investments over time.

First there is the important issue of trading costs. Buying and selling investments costs money. If an investor makes changes to their portfolio, they need to be as certain as possible that any gains they make will outweigh the cost of trading. There are a number of reasons why this might not be the case.

Herd behaviour

The most important reason is behavioural. Investors tend to run with the herd. There is some reassurance in doing the same as other people. However, it is bad news when it comes to investing. It tends to mean buying at the top of the market, when lots of other people are buying and prices are highest, and selling at the bottom of the market, when everyone else is selling and prices are lowest.

As a result, being influenced by changes in the market or investment environment can be bad news for your long-term returns. The strongest gains in the market can come immediately after a significant fall or on specific days. If investors had sold out at the first sign of trouble, they miss out on the gains, and the chance to recover their money.

Compounding returns

Compound interest plays an important role in generating long-term wealth, but in order for it to work, investors have to leave their investments alone. They need to allow dividends to roll-up and for gains to be re-invested. Investing £10,000 in the FTSE 100 Index in January 2003 would have been worth £20,795 at the end of December 2018 this year if dividends had been taken as income. Had they been reinvested it would have almost doubled to £38,1871.

Holding periods are getting shorter and shorter. In 2018, the FT2 reported that the average holding period for a stock on the NYSE had fallen from two months in 2008 to just 20 seconds. This brings real advantages for those willing to look through the noise and take advantage. It means that prices do not always reflect a company's inherent value and therefore provides opportunities for the patience to wait.

However, that doesn't mean you shouldn't review your investments from time to time. A portfolio should always reflect your considered views - the long-term strength of the US, the weakness of Europe, for example.

Stock markets are volatile, and share prices will jump around. However, over time, they will reflect a company's real outlook and prospects. Investors just have to be patient.


1 Source: Swanlow Park Asset Price Calculator
http://www.swanlowpark.co.uk/asset-price-calculator

2 Source: FT/Cumberland Advisors, 2 Aug 2018
https://www.ft.com/content/cdbdd01a-95b4-11e8-95f8-8640db9060a7 and https://www.interdependence.org/resources/quantitative-finance-and-stock-market-2/#.XNlB1PZFzIW

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