Time in, not timing, the market counts

05 July 2019

By Henk Potts, Senior Investment Strategist

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.

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).

Equities outperform over the long term

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.

Extend the period to 10 years and your chances of [equities] beating cash rise to 91%.

UK equity performance statistics since 1899

Number of consecutive years
  2 3 4 5 10
Outperform cash 81 83 85 87 100
Underperform cash 37 34 31 28 10
Total number of years 118 117 116 115 110
Probability of equity outperformance 69% 71% 73% 76% 91%
Outperformance bonds 80 87 87 83 85
Underperform bonds 38 30 29 32 25
Total number of years 118 117 116 115 110
Probability of equity outperformance 68% 74% 75% 72% 77%

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.


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