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Staying invested can improve returns

by | Jul 1, 2022

For most investors, their biggest concern is losing money. Because losing money can provoke a powerful reaction – some investors turn to market timing (the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods.). Fleeing  to “safer” investments like cash when the going gets tough is a common consideration.

But is it a good idea to move assets from your current portfolio to what you think are more stable investments?

The chart below illustrates the investment experience of three hypothetical investors during a challenging time in the markets. The light blue line shows the path for the investor who exited the market and remained invested in cash. The medium blue line shows the investor who exited the market in the downturn but reinvested in their original portfolio after one year. The dark blue line shows the path for the investor who stayed invested despite the market downturn.

£10,000 invested during the COVID-19 pandemic
(Portfolio of 65% stocks and 35% bonds)

For illustration purposes only.

Portfolio Blend: Assumes buying in at high and out at 31 December 2019 and out at March 2022. Assumes invested in cash if not in market. Source: SEI, Bloomberg. Past performance is not a reliable indicator of future results.

It’s clear that the investor who remained invested benefited most from the market rebound, ending up with more than £10,581.01 at the end of March 2022.

Investors who stick to their investment plans can be well-rewarded over the long term. Impulsive investors who abandon the market during downturns risk missing out on the often strong, ensuing rebounds.

A few days can make a big difference

Investors can sometimes stress out about deciding when to invest. Market movements are difficult to predict, even for seasoned investment professionals. Explosive bursts of volatility, both positive and negative, can be the norm, but investors who delay their investment waiting for the “perfect” time may run the risk of missing periods of exceptional returns.

The chart below shows an example of how investment returns can be negatively impacted by missing a few good days in the market.

Annualised returns using daily total returns of the FTSE 100 Index. Source: Bloomberg, SEI. Past performance is not a reliable indicator of future results. Index returns are for illustrative purposes only, and do not represent actual performance of an SEI Fund. Index returns do not reflect management fees, transaction costs, or expenses. Indexes are unmanaged and one cannot invest directly in an index. If an investor missed only the best 10 days during a 20-year period, more than 30% of the gains would be lost. And missing the best 20, 30, and 40 days resulted in a loss.

Clearly, missing out on the best market days can seriously diminish long-term performance. We believe it’s important to keep a long-term perspective and stay focused on your financial goals. History has demonstrated that markets have always rebounded from down periods to reach new heights. The key is to stay invested to reap the rewards.


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