- 1st June 2023
- Posted by: Celticfp
- Category: Financial Planning
Staying Invested: The Power of Patience in Portfolio Management
As investors, we are constantly faced with decisions that can dramatically shape our financial future. From deciding which asset classes to invest in, to determining the perfect time to buy or sell, these choices are integral to the investment journey. Amidst all this, a crucial principle often becomes less evident: The power of staying invested.
We’ve recently conducted a comparative analysis of three different investment strategies: staying invested, exiting the market and reinvesting after a year, and exiting the market to stay in cash. This comparison was performed on an investment portfolio composed of 65% stocks and 35% bonds from December 2019 to March 2022.
The results? Quite revealing.
The Power of Staying Invested
Our study indicates that staying invested yielded the highest return. Despite the ups and downs of the market during this period, a steadfast investment approach resulted in a return of £10,518.01. This approach benefits from the power of compounding, dividends, and the overall upward trend of the markets over time. It demonstrates that timing the market is not as beneficial as time in the market.
The Cost of Market Timing
The second strategy we evaluated involved exiting the market and waiting a year to reinvest. This approach is predicated on the idea of timing the market – a notoriously difficult feat even for seasoned investors. The return on this strategy was £9,072.43, a noticeable decrease from staying invested. The costs of this strategy include potential capital gains taxes, transaction costs, and, most importantly, missing out on market recoveries or growth during the exit period.
Staying in Cash: A Deceptively Comfortable Choice
Finally, we considered the scenario where an investor completely exits the market and remains in cash. At first glance, this may seem like a safe option, providing shelter from the market’s volatility. However, it also sidelines you from potential gains. In our study, this strategy yielded the lowest return at £8,488.70. It’s crucial to remember that while cash doesn’t lose nominal value, it does lose purchasing power over time due to inflation. Thus, staying in cash for extended periods can erode the real value of your wealth.
Investing is as much about resilience as it is about making the right decisions. Market fluctuations are inevitable, but history shows us that, over time, the trajectory of the market has been upward. Our analysis highlights the importance of maintaining a long-term perspective and underscores the potential cost of trying to time the market or staying out of it completely.
While every investor’s situation and risk tolerance is unique, this study suggests that a disciplined, patient approach of staying invested often pays off in the long run. It’s a potent reminder that, in the realm of investing, patience is indeed a virtue, and often, a profitable one.
Celtic Financial TV
Every month you can now watch a short market update with our head economist Chris Bailey on YouTube, simply head over to Our Channel – here you can watch our market update archive.
This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.
Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.