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.

The past few months have meant a lot of change for us all - and a lot of uncertainty too. Many of us have been redrawing our financial plans in the face of lockdown and thinking again about the future. That includes our savings for retirement.

It’s not always easy. On the one hand, we see the need to get our savings on track so that we’re fit to face whatever the future brings, but on the other, there’s the temptation to hold back investing money now as stock markets react to the latest headlines.

Unfortunately, there’s rarely a time when there isn’t something to worry markets - pandemic or no pandemic. And it’s still as important as ever to save for your retirement.

Research carried out by Fidelity earlier this year - before Covid-19 took hold - showed that only 29% of people in the UK were on target to meet their retirement savings goals. Meanwhile, 41% of people polled needed to give their savings attention if they were going to build a retirement fund to match their expectations1. The losses for markets since then are likely to have knocked retirement funds - and confidence - even more.

Given that, some might choose to wait until the outlook improves before they commit money to the stock market, inside a pension or anywhere else, but there’s evidence to suggest that could be a mistake. Attempts to time investments in anticipation of a market upswing are no more than a shot in the dark - and they can be stressful into the bargain. You might get it right, or you might get it wrong. It’s better - and certainly less stressful - to automate your contributions to a retirement fund so that you’re not tempted into a decision that you regret.

Further analysis by Fidelity reveals the potential benefits of regular investing, and why attempts to time the market seldom work. It looked at three hypothetical investors - ‘Steady Eddie,’ ‘Bad Timing Bob’ and ‘Good Timing Gina’ - and their investment habits over a thirty-year period. These figures are hypothetical and don’t include charges, so the actual final values are likely be lower. It’s also important to know that these examples are based on past performance, which is not a reliable indicator of future returns.

Our first investor - ‘Steady Eddie’ - began investing regularly in the FTSE All Share 30 years ago, making monthly contributions worth £1,000 a year. His contributions then rose each decade - rising to £2,000 a year after 10 years and £3,000 after 20 years. In total, Eddie made contributions of £60,000 but compounded growth meant his final pot after 30 years had reached £131,732.

Our second and third hypothetical investors took a different approach. They tried to time their investments in the hope that they could catch the upswings but miss out on the downswings. They made the same total contributions as Eddie did, but diverted these into cash for periods when they were out of the market.

Our second investor - ‘Bad timing Bob’ - got it all wrong. He only invested in the FTSE All Share when the market hit a cyclical peak just before a downturn, meaning he bought in when markets were high. Not surprisingly, Bob did worse than Eddie, building a pot worth just £100,301.

Our third investor - ‘Good timing Gina’ - got her timing right, managing to invest her contributions when the market hit a cyclical low, yet even she could not match the returns of Eddie’s regular contributions, building a pot worth £ 113,229.

The perils of attempting to time the market


Fidelity International, September 2020, returns are based on total return in GBP of the FTSE All Share, and returns from the Morningstar UK Savings 2500

Far from slow, Steady Eddie certainly won this race - demonstrating exactly why time in the market matters more than timing the market. Basing the timing of your investments on assumptions about how markets may behave in the future could well limit your potential returns in the long-term.

Time is the single biggest factor that determines growth opportunity, although of course there are no guarantees. Eddie’s approach of regularly drip-feeding his investments has two significant advantages over timing the market. Firstly, it allows for his money to benefit from the power of compounding if the funds invested in are the type that generate income which you use to reinvest rather than it being paid out to you. Over time this will compound, as effectively you’re getting interest on interest, helping your savings to grow even faster.

Secondly, by steadily making contributions, he benefits from a process known as pound-cost averaging. This means he buys more units in his investments when prices are low and fewer when prices are high.

Building a fund to provide the future you want takes time and dedication to save what you can, as early as you can. But it doesn’t have to mean a lifetime of fretting about markets and the day-to-day value of your pot. By making pre-determined contributions to your investments via a regular savings plan, you’ll take the worry out of saving and avoid delaying investing your money while you wait for the right moment which, as our scenarios show, could compromise your returns.

Five year performance

(%) As at 30 September 2020 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
FTSE All-Share 16.82 11.94 5.87 2.68 -16.59

Past performance is not a reliable indicator of future returns. For illustrative purposes only. This chart is based on the performance of the FTSE All-Share Index between 1 October 2015 and 30 September 2020 and does not take into account the impact of any charges or fees. Source: Datastream / Refinitiv, Total Return, in GBP.

Source: 1Fidelity Global retirement Survey - June 2019.

Important information - Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change in the future. You can't normally access money in a pension until 55. 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. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals.

Topics Covered

Regular saving, Investing principles, Saving for retirement, Volatility

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