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Investing the ‘no brainer’ way

Ed Monk

Ed Monk - Fidelity Personal Investing

This week we published the latest edition of our Quarterly Investment Outlook and invited investors to ask their own questions about markets in a live webcast Q&A.

Investing the ‘no brainer’ way

We had a great response and far more questions from curious investors than the 20 minutes we set aside would allow. But we got through a good number, including one that seems to be asked in some form or other every time we hold one of these.

Roughly speaking it went: “Given the uncertainty around right now, and the quite high level of markets, is now a good time to take some profits?”

It’s an understandable question. Buying low and selling high is the simplest expression of what every investor is trying to do. Who among us hasn’t dreamt of the perfect scenario of getting in early, riding the upward wave and then jumping off at just the right moment, perhaps ploughing your profits into the next lowly priced asset that is due a surge? That’s how fortunes are made.

But the fact that relatively few fortunes are made this way indicates just how hard it is to pull off.

The past year in markets is a good example of why attempts to time investments like this so often prove unsuccessful. Taking the FTSE 100 as our measure, prices suffered a sharp fall in the second half of 2018. Those who sold out before the worst losses hit in October 2018 would have been initially very pleased with their timing. The index fell around 12% between October and January.

But from that point onwards markets have bounced back strongly, creating a V-shape recovery. Prices today are now slightly ahead of where they were at the point of the big falls last October.

So - at what point would those expert market timers from last year have jumped back into the stock market. After all, that is what’s necessary if they are to lock-in their initial correct call.  Undoubtedly there will be some who got it just right, buying again at the start of this year, but I’d wager those people are few and far between.

Having already been proved right in their initial selling decision, they will have felt vindicated by the relentless negative headlines about trade and Brexit that were swirling around at the start of the year. To buy back in at that point, they would have had to ignore all that bad news and go against the crowd. While it would have felt very comfortable to sell in 2018 when markets were high, it would then feel distinctly uncomfortable to buy back in in 2019 - yet this is exactly what the market timer has to do to be proved right. Market timing doesn’t require simply one right call, it requires two.

What, then, of the investor who stayed invested? Well today they would see prices back to the level they were before the latest squall in markets. I strongly suspect that puts them in a better position than most of those who sought to jump off last year and buy back in later. Moreover, they have got here via a far easier route, psychologically speaking. You could say that, by turning their brain off and sticking to a pre-determined strategy of staying invested, they have come out on top.

Taking this ‘No Brainer’ approach doesn’t have to be as unthinking as it sounds. There are many ways that you can tilt the odds in your favour even in falling markets.

Investing in regular amounts via a fund that is regularly rebalanced, whether it’s a passive ‘tracker’ or run by a fund manager, means that each month you buy more of the assets that have fallen in value and fewer of those that have gained.

That really is buying low and selling high.

More on the Investment Outlook

Five year performance

As at 30 June
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
FTSE 100 0.8 3.2 16.6 6.5 4.6

Past performance is not a reliable indicator of future returns

Source: Refinitiv from 30.6.14 to 30.6.19. Total returns in GBP terms.


Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.