Liontrust Views Autumn 2022 - Magazine - Page 11
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Most investors will have heard the phrase ‘time in the market, not timing the market’
over the years and logged it as another financial cliche. And yet this phrase embodies
perhaps the most fundamental lesson of successful investing: patient accumulation of
returns, year after year, delivers long-term results.
Staying the course when investing is a simple lesson to understand
but, for many, the hardest to apply when faced with the reality
of rising and falling markets. We saw an extreme example of
volatility when the full ramifications of the pandemic became
clear last year, with a huge dip in March/April followed by a
swift recovery. Those who stayed invested quickly saw paper
losses evaporate but many that panicked into selling will have
seen substantial damage to portfolios – potentially exacerbated
by not getting back into markets fast enough to capture the
rapid recovery.
Investing will always involve market dips and volatility from time
to time but history shows these events have little impact on longterm performance.
Consider the following figures on the impact of reacting to shortterm noise: missing the best 50 days in markets over 11 years
from March 2009 to February 2020, just 1% of trading days,
would have reduced the return from £100,000 invested in an
average Cautious Managed fund from just over £218,700 to
just under £130,000 – which equates to 75% lower returns.
£100,000 invested in a Cautious Managed Portfolio in March 2009
£250,000
£218,766
£185,368
£200,000
£163,188
£149,169
£150,000
£138,779
£129,998
£100,000
£50,000
£0
Fully invested
Missing 10 best days
Missing 20 best days
Missing 30 best days
Missing 40 best days
Missing 50 best days
Source: Liontrust, Morningstar. Cautious Managed Portfolio represented by IA Mixed Investment 20-60% Shares sector average £ total returns from 8th
March 2009 to 20th February 2020.
One of our favourite pieces of data shows that over rolling
three-month periods in the last 25 years, the FTSE 100 has
been down 30% of the time and up 70%; if you extend this
period to rolling 10-years, the ratio shifts to 98% positive
periods. Making decisions based on short-term data rarely
produces good results.
We believe in what we call noise-cancelling investment: staying
the course in a well-diversified portfolio and ignoring market
fluctuations as far as possible. Where investors have been
unable to do this, however, it is typically better to be too early
into markets than too late, particularly when it comes to
recoveries from bear markets. It is better to be
sitting on a train for a few minutes before
it departs than trying to chase it down
as it pulls out of the station.
Looking over history, there are lessons to take from recoveries,
which also apply to 2020. Bear markets typically have been
relatively short compared with recoveries and have had a
modest impact on returns compared with the long-term power
of bull markets. According to figures from Capital Group, the
average bear market going back to 1950 has lasted 14 months
with a return of around -30% while the average bull period has
lasted five times longer, with total returns of close to 280%.
These stats clearly show the benefits of staying the course and
not being panicked into selling but are also a stark example
of why too early beats too late, especially when it comes to
market recoveries.
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