Invest like an Olympian

Daniel Lane
Daniel Lane
Fidelity Personal Investing11 October 2017

In my much fitter youth I spent a few seasons clearing hurdles for the local athletics club. I started to do quite well and believe my own hype a bit until the year one of my rivals wiped the floor with me. In a few races he put an end to any ambitions I had and I never did figure out how he did it.

I bumped into him last week and felt the urge to remind him of the 2006 Ulster Intermediate Boys 100m Hurdles final until he told me about his journey to the Olympics, and his national record at the World Championships. All equal in our eyes clearly but maybe not his.

When I did eventually ask him how he improved so much, his answer was frustratingly simple. While everyone else was obsessed with speed and technique, he focused on finding a rhythm that let him clear every barrier with the same pace as the last. This meant he never clipped a hurdle, overshot or had to slow down, while the rest of us inevitably did at some point.

Steady wins the race?

As a way of preventing the daydreams of what could have been (it couldn’t have) I wondered if all of this rhythm talk was applicable to the rest of us. We always hear that we should never time our investments but what if we did? Should we wait for the price drops or just set up a regular savings plan, and what does history tell us?

To make it a bit more human I had a look at the attitudes of three hypothetical investors to see what timing the market does to our investments over the long term. Meet Steffi, Bob and Gary.

Steady Steffi, who began investing regularly in the FTSE All-Share Index in 1986, putting in £1,000 on the 1st January each year during the 1980s and bumping up her annual investments by £1,000 each decade until September 2017, would have seen her original investment of £85,000 grow to £284,937.

On the other hand, Bad Timing Bob, who only invests in the FTSE All-Share at the top of the market, is left with nearly half as much. Unlike Steffi, he invested just before market downturns like the bursting of the dot.com bubble and the credit crisis. As a result, Bob’s original investment of £85,000 would be worth £147,229, nearly £138,000 less than Steady Steffi.

Even Good Timing Gary, who only ever invests in the FTSE All-Share when the market is at its lowest, is unable to match Steady Steffi. In the nigh on impossible scenarios where he successfully times the market, Gary’s original investment would have returned £236,501 - over £48,000 less than Steady Steffi.

Investor

Total amount invested/£

Returns/£

Steady Steffi

85,000

£284,936

Bad timing Bob

85,000

£147,229

Good timing Gary

85,000

£236,501

Source: Fidelity Personal Investing, October 2017

“There are two types of people: those who can’t time the market and those who don’t know they can’t time the market”

Terry Smith

What we find is that, even if we were able to time the market perfectly, the time spent in the market is much more beneficial for our returns. Even if you can pick your moments with skill, leaving your money idle while you wait for the right time to invest can seriously compromise your long-term returns.

Our analysis shows that the most sensible approach is to stay invested and to drip feed your savings into the market month after month. By investing regularly like this you benefit from a process known as pound-cost averaging – you buy more shares when prices are low and fewer when they are high. As importantly, you allow the wonderful power of compounding to work its magic on your savings for the maximum available time.

Now, where did I put those running spikes?

Five year performance

(%)

As at 10th October

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

FTSE All-Share Index

17.7

1.9

7.5

13.8

11.5

Past performance is not a reliable indicator of future returns

Source: Datastream from 10.10.12 to 10.10.17, price index in £ terms.


Important Information

The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give investment advice. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.