We have all been told to ‘follow our instincts’ at some point in our lives but, when it comes to our finances, research has shown that going against what comes ‘naturally’ could help you achieve your long-term financial and lifestyle goals faster.
Buying low and selling high is every investor’s goal. And when markets fall the temptation is to sell to avoid further losses. However, timing the market is notoriously difficult and, allowing our emotions to cloud our decisions, could cost us dearly.
At Finura, one of our core approaches to financial planning is to use behavioural finance techniques to help our clients uncover the drivers behind their financial decision making. This can be achieved by assisting clients in understanding their investor personality.
By helping clients to gain a better understanding of the behavioural thoughts, feelings and emotions that drive their financial decision making, we empower them to make rational financial decisions that put analysis ahead of instinct, and thus reduces their likelihood of making choices driven by impulse.
Research from Schroders* has shown that, over three decades, mistimed decisions on an investment of just £1,000 could have cost more than £17,000 in returns.
If you invested £1,000 in the FTSE 250 at the start of 1988 and left it alone for thirty years, the investment could have been worth £23,800 by the end of 2018.
If, however, you had tried to time your entry in and out of the market during those thirty years, and subsequently missed out on the index’s best thirty days, your investment might now only be worth £6,749. This is £17,051 less (not adjusted for the effects of charges or inflation.)
Below are the different % annualised returns you could have achieved based on how many of the index’s best days you may have missed by opting to move your money in and out of the market.
While a 2% difference in between being invested in the FTSE 250 the whole time and missing the best ten days may seem small, the effects build up over time and could have cost you nearly £10,000. Also, historically, according to Schroder’s research, many of the stock market’s best days have followed some of the worst,
The below chart illustrates what your £1,000 invested in 1988 could be worth now across three different indices, based on staying invested the whole time or missing the 10, 20 or 30 best days.
Nathan Mead-Wellings, Director at Finura, comments: “We would all like to think that any money we choose to invest will earn us decent returns but, what all investors should know is, we are ultimately at the mercy of where we are in the current market cycle and that there will almost certainly be periods of both volatility and stability. At Finura, we encourage our clients to take a long-term view on their financial plans, and to assist them in not letting periods of poor performance cloud their decision making.”
* Research based on the performance of three indices affecting the UK Stock Market – the FTSE 100, the FTSE 250 and the FTSE All-Share.
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