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Investing is not a matter of timing

Evidence based investing

Nobody wants to invest a lump sum just before share prices fall. With global stock markets hitting new highs this is a valid concern for an individual looking to invest; especially given interest rates are still at very low levels. However if we assume investors, unlike speculators, are not concerned about the next week or quarter but are putting capital to work for medium to long term objectives such as to fund their retirement years – should timing the market be a consideration?

Consider the case of Bad Timing Bob1, he only ever invested at the top of the market. But he had a strategy which he stuck to consistently so he could retire aged 65 in 2013. He set aside £1,000 a year in the 1970s (£10,000), £2,000 a year in the 80s (£20,000), £3000 a year in the 90s (£30,000) and then £4,000 a year until he retired (£52,000) – in total he set aside £112,000 to invest in the stock market.

Remember he always invested at the top. In the opening decade he invested his accumulated savings just before the oil crisis affected markets in 1972 (£3,000) then watched as the FTSE All Share collapsed by 60% between 1973 and 1974. Bob’s saving grace was he never sold. After a while he felt confident again and invested his accumulated savings (£23,000) in the market in September 1987, in October the market fell by 10% on Black Monday and another 10% on the Tuesday. In December 1999 he had rebuilt his confidence and invested £34,000 just before the dotcom bubble burst. By 2002 he had lost 50% thanks to his third foray into the stock market. Undeterred, although a little shell shocked, he tried a fourth time in October 2007 with £32,000. Along came the credit crisis and 50% of his investment was wiped out. He saved a further £20,000 (which he held in cash!) up to his retirement I n 2013 – total £112,000.

Here is the surprise….. Bad Timing Bob ended up with a retirement fund of £632,000 on the total investments of £112,000. He simply stuck to his plan, never sold at the bottom and benefited from the long-term upward trend in share prices and compound interest in dividend income. This example shows that short-term market setbacks should not matter to serious investors.

‘The value of an investment and the income from it could go down as well as up’

1 Taken from a study by HSBC Private Bank

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