7 Rules For Investing – The Time In The Market – Rule 4
The Time In The Market
This is a very important rule to understand if you are considering your ‘time’ of entry into, or exit from the investment market: Its time in the market not timing the market that counts.
By taking a long-term view of investing, investors aim ride out any short-term fluctuations in the market and take advantage of the potential growth over the long term. i.e: If you invest in a fund with a seven year timeframe but lose confidence based on poor market returns and sell your investment after only four years you could lose out on any upturn in the market and three years of potential growth.
The crash of 1987 – a tale of two timeframes.
The famous crash of 1987 had a devastating effect on some investors whilst for other the crash had less of an impact. The follow case stiudies illustrate this:
Case study: Jeremy
Jeremy invested $10,000 in a fund in September 1987. The market suffered its crash the following month, in October 1987. Jeremy hung in for a further 3 years yet felt that markets had been disappointing and decided to ‘cut his losses’ and sell out of his fund, thinking it would never regain all the ground it lost in 1987 and feard further loss. During this 3 year period the fund matched the return of the ASX All Ordinaries Index which gave him a very disappointing result – an annualised loss over the three years of -10.36 pa.
Case Study: Katie
Katie invested $10,000 in the same fund in September 1987. The 1987 crash had exactly the same effect on her investment, however she took a long-term view and held on her investment, as per her original plan, which was until her retired in 2007. The overall impact of the crash was very minor on Katie’s long-term investment as she received an annualised return over the 20.5 years of 8.55% pa.
What is an index?
AN index measures the change in value of a particular group of investments over time. For example, The S&P/ASX All Ordinaries Accumulation Index measures the share price movements as well as the dividends (assuming they were reinvested) of the largest 500 stocks listed on the Australian Securities Exchange (ASX).
Think in years, not days.
Trying to time your entry or exit into the investment market can be hazardous
, so the best idea is simply not to worry about the day you invest or sell on and focus on the years you invest in. In the 10 years to 31 March 2008, the annualised return for the S&P/ASX All Ordinaries Accumulation Index was 11.41% pa. If you remove the five best performing days over that period that return drops to 9.13% pa. Remove the best 30 days over those 10 years, the annualised return drops to 2.86% pa. Nobody could predict when those best days were going to occur so the only way you could take advantage of them was to be invested in the market for the full 10 years.
Source:Colonial First State
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