Time in, not timing, the market counts

Fighting cautious instincts

The longest period of economic expansion on record, coupled with surging geopolitical anxiety, has clients questioning if this cycle is coming to an end. Indeed, it has encouraged some to hold off investing in risk assets, or reduce exposure, and hold a significant proportion of their portfolio in cash.

In order to preserve the long-term purchasing power of their wealth, investors need to generate a return that is equal to or preferably higher than inflation. To meet that requirement, historically low interest rates have forced many to put money in higher-risk strategies rather than cash deposits.

Moving up the risk curve unnerves some clients in the short term, especially during challenging periods such as last year: equities, fixed income and cash all generated negative real returns in many markets in 2018. Out of the major asset classes, global equities were punished the most, posting their weakest performance since the financial crisis. This rather shocked investors who may have become complacent after years of positive real returns and low levels of volatility.

Equities have rebounded this year. But, a persistent wave of negative headlines continues to disturb markets. The flaring up of trade tensions in May and the consequent US$2tn fall in equity values was a reminder of how quickly stock markets can move over a short period of time. Against the backdrop of rising volatility and macro concerns, it is not surprising clients have been cautious about if and when to increase their exposure to risk assets.

When to invest?

History shows that identifying the perfect point to buy an investment is a difficult, if not impossible, game to play.

For long-term equity investors, the most effective entry point has generally been when headlines are the darkest and markets are weak and cheap. However, emotionally this can often be a difficult decision to make. Many investors invest when headlines are positive and equities are expensive. This means investors are vulnerable to buying high and selling low.

What to invest in?

After appreciating the need to invest, the next hurdles to overcome are where to put your money to work and over what time horizon. The Barclays Equity Gilt Study 2019 shows the nominal performance of £100 invested in cash, bonds or equities between 1899 and 2018 (see below).

The Barclays’ study shows that £100 invested in cash in 1899 would be worth just over £20,000 today. If invested in gilts, the same £100 would be worth close to £42,000. However, £100 invested in equities in 1899 would now be worth around £2.7m. While the data provides compelling evidence of equities’ outperformance over 118 years, most of us have far shorter investment horizons.

Time is on your side

Many market participants spend much energy trying to gauge the direction of stock markets in the short term. That effort would be better spent by considering the probability of outperformance across the major asset classes over a range of time periods.

Again we can turn to the Barclays Equity Gilt Study for the answer. UK equities outperformed cash for two consecutive years in 81 out of the 118 periods studied. So, while the probability of equities beating cash over two years in a row is 69%, extend the holding period to 10 years and your chances of beating cash rise to 91%. The corresponding equity outperformance comparison versus bonds is 68% over two years and 77% over ten.

UK equity performance statistics since 1899

Source: Barclays Equity Gilts Survey, April 2019

Understanding the long-term risk/reward profile of different asset classes should help investors make a more informed choice. Getting invested and staying invested through a balanced, globally diversified portfolio with a large weighting to equities has consistently given clients a much better chance of preserving and growing their wealth throughout different cycles. Time in the market is far more important than timing the market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

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