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Trying to time the stock market could result in ‘significant’ losses

Tahmina Mannan
Written By:
Tahmina Mannan
Posted:
Updated:
30/05/2013

Staying invested, rather than trying to time the market to avoid the dips, can make the difference between big gains and significant losses, analysis of the FTSE 100 has shown.

According to investment platform, Sippdeal, investors stand to make better returns if they leave their investments to weather the volatility in the markets rather than trying to ‘time’ them.

The report looked at returns of the FTSE 100 over the past decade to end of March 2013, and revealed that an investor who tried to time the market and got it wrong could be left with a far less profitable outcome.

Investors who missed out on the 10 best days of the past decade would see their total return fall from 120.7% to 35.3%. Missing the 20 best days would have generated a 12.8% fall.

But had the investor left the money in the market throughout the 10 year period, and weathered through the ups and down – they would stand to gain a return of 6.1% per annum or 120.7% in total.

Billy Mackay, marketing director at AJ Bell, said: “Trying to time the markets is virtually impossible. It is almost inevitable that by doing this, a person will miss a turning point or days when the market rises. Over the period covered by our data, it’s not uncommon for the FTSE to gain more than a 2% in a single day and on at least one occasion it bounced by almost 5%, missing such days would prove extremely costly.

“In reality, it is extremely unlikely that someone trying to time the markets will miss all the best days or capture all the worst. But that is the point – for most people, the results of the market timing may well end up being more down to luck than judgement.”

Investors are being advised to drip-feed into their investment pots – where they add additional cash into the market over time. This is said to help smooth out the effects of market volatility on investment portfolios.

Mackay added: “Buying low and selling high is the aim for any investor, but even veteran investment professionals will tell you how difficult this is because markets can be so unpredictable. For many people, regularly drip-feeding money may be more sensible strategy.”