When it comes to investing, a well planned strategy can greatly improve outcomes. Focusing on investing over the long-term is one such approach that has demonstrated its value over extended periods. Many industry professionals advocate for this methodology, underlining its benefits in generating stable returns.
This emphasises the principle of “time in the market” over “timing the market.” While the latter involves trying to predict market movements, the former showcases its value through consistent investment over extended periods.
Let’s further explore this time-tested investment approach.
What is Time in the Market?
Long term investing, or “time in the market”, involves allocating your funds to a portfolio and holding onto it for a duration of time. This strategy focuses on the tendency of the stock market to grow over time – even during periods of decline.
The Financial Times Stock Exchange 100 Index, also known as the FTSE 100, serves as a stock market indicator that tracks the performance of 100 companies listed on the London Stock Exchange (LSE). On average, the FTSE 100 has outperformed inflation. Over the last 119 years, UK stocks have made annualised returns of +4.9% over and above inflation .
What this means is that, on average, investing in a diversified portfolio that mimics the FTSE 100 would not only help preserve the purchasing power of your capital (eroded by inflation), but also grow it.
For example, consider that you invested £10,000 in a portfolio that mimics the FTSE 100. If it continues to make an average annualised return of 4.9% above inflation, then, over 30 years, this amount could grow to approximately £40,286 in today’s money (ignoring taxes and transaction fees). This is calculated using the formula for compound interest.
You’d have more than four times your original investment in real terms, meaning after adjusting for inflation. This type of growth can have substantial implications for long-term financial goals like retirement planning, education funding, or wealth accumulation.
Here’s a graph of the FTSE-100 performance from 1984 to present day:
The FTSE 100’s track record is a compelling case for the ‘time in the market’ investment strategy. While there have been periods of downturns and volatility, long-term investment in the index has yielded annual returns significantly above inflation. This suggests that investors who have been patient and remained invested for extended periods are more likely to achieve gains that outpace inflation, thereby growing their real wealth.
Investors who adopt the “time in the market” approach can navigate through expected short-term market fluctuations – while capitalising on the upward trajectory of the market over time. The long term performance of the FTSE 100 serves as an excellent example, highlighting how important it is to consider time in the market.
A Global Perspective
While the FTSE 100 offers a compelling case for long-term investment, particularly for those focused on the UK market, it’s worth expanding the scope to consider other globally significant indexes. The S&P 500, for instance, has been another strong performer in long-term investing.
The S&P 500 is a U.S.-based index tracking the performance of 500 large companies listed on American stock exchanges. It is often considered an indicator for the U.S. economy, one of the largest and most diversified globally. According to historical data, the S&P 500 has achieved an average annual return of approximately 10% over the last 100 years . This surpasses the FTSE 100’s long-term annualised return of 4.9% above inflation, although it’s important to note that past performance is not indicative of future results.
Several factors contribute to the S&P 500’s robust returns:
- Diverse Economy: The U.S. market includes a wide range of sectors, offering built-in diversification.
- Market Liquidity: Higher liquidity means that it’s generally easier to enter and exit positions in the U.S. market.
- Innovation and Growth: Many companies in the S&P 500 are at the forefront of technological and medical advancements, often leading to above-average growth rates.
However, the S&P 500 is not without its challenges. It is subject to currency risk for investors not based in the United States, and its valuation can often be higher compared to other markets. These factors make it essential for investors to diversify and not solely rely on any single index for long-term investing.
As with any investment, it’s essential to consider your risk tolerance, time horizon, and overall financial goals.
PAST PERFORMANCE IS NOT A GUIDE TO FUTURE PERFORMANCE AND SHOULD NOT BE RELIED UPON.
Advantages of Long-Term Investing
Long-term investing offers an attractive advantage in terms of reduced risk. By maintaining your investments during market fluctuations, your portfolio becomes more robust against short-term volatility. This is primarily due to the fact that most markets have demonstrated an upward trajectory over extended periods, despite occasional downturns. For instance, historical data shows that the stock market has yielded an average annual return of 10% over the past five decades .
Allegedly, Albert Einstein once dubbed compound interest the “eighth wonder of the world.” In simple terms compound interest refers to the reinvestment of earnings or interest, which, when done consistently, leads to exponential growth over time. The fundamental principle behind it is that the longer your money remains invested, the more substantial its growth potential becomes. Therefore, starting your investment journey as early as possible allows your assets to benefit from this power of compounding.
Simplicity and Accessibility
Long-term investing offers a more accessible approach compared to attempting to forecast market fluctuations. This strategy is particularly beneficial for individuals who may not have the availability or inclination to closely monitor market trends and economic indicators.
When you hold onto your investments for more than a year in the UK, they usually qualify for a reduced tax rate on any profits you earn. Conversely, short-term investments are taxed at the same rate as your income tax. That’s why long-term investing can be financially profitable.
HM REVENUE AND CUSTOMS PRACTISE AND THE LAW RELATING TO TAXATION ARE COMPLEX AND SUBJECT TO INDIVIDUAL CIRCUMSTANCES AND CHANGES WHICH CANNOT BE FORESEEN.
Potential Downsides of Time in the Market
Missed Short-Term Opportunities
When you stick to a long-term investment strategy, there’s a chance that you might overlook opportunities in the short-term. Although trying to time the market can lead to higher returns within a shorter period, it also carries higher risks.
If you adopt a “set it and forget it” approach, your investment portfolio could become imbalanced over time due to varying performance across types of assets. It is crucial to rebalance your portfolio to maintain a beneficial distribution of assets. This is why many people opt to work with a financial adviser.
Practical Tips for Long-Term Investors
One effective long-term investment strategy is pound cost averaging. This approach involves investing a fixed amount at regular intervals – no matter the state of the market. By employing this approach, it can help mitigate the impact of market fluctuations and eradicate the variables that frequently influence investment choices. Ultimately, this technique can make it easier to stay committed to your term goals.
Periodic Portfolio Rebalancing
Check your portfolio at least annually, and readjust your asset allocation to align with your financial goals and risk tolerance. This may involve selling high-performing assets and buying more of the underperforming ones to maintain your desired asset allocation.
Consult a Financial Adviser
Consider seeking the expertise of a financial adviser to tailor an investment strategy to your specific needs and lifestyle. An experienced adviser not only helps optimise your portfolio in line with your long-term goals and risk tolerance, but also navigates the complexities of the financial markets on your behalf.
An adviser’s expertise can be invaluable during market volatility, providing objective, data-driven insights that can help you adhere to your long-term investment plan. This disciplined approach often leads to better outcomes.
Managing investments can be time-consuming and stressful. With an adviser overseeing your portfolio, you save both time and stress. The adviser can also integrate your investments into a broader financial strategy, including retirement preparation, estate planning, and tax optimisation.
Pairing the solid history of stock market indexes such as FTSE 100 or S&P 500 with professional advice creates a powerful strategy for long-term wealth growth, risk management, and peace of mind.
Investing is not something that can be approached with a one-size-fits-all mindset. However, many investors find the “time in the market” strategy attractive because it offers advantages that cater to a wide range of individuals. Its ability to minimise risk, leverage tax benefits, and harness the power of compound interest sets it apart as a wise choice for individuals willing to adopt a patient, long-term outlook to their investments.
Keep in mind that while historical data can provide valuable insights, it doesn’t assure future performance. Always consult your financial adviser before making investment decisions.
 IG.com – What are the average returns of the FTSE 100?
 Trade that swing – Historical Average Stock Market Returns for S&P 500 (5-year to 150-year averages) – July 2023
 The Motley Fool – Average Stock Market Return
THE VALUE OF INVESTMENTS AND ANY INCOME FROM THEM CAN FALL AS WELL AS RISE, AND YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A GUIDE TO FUTURE PERFORMANCE AND SHOULD NOT BE RELIED UPON.