Investing in the stock market during volatile markets

Should you invest in the stock market during uncertain economic times when many pundits are warning of serious trouble ahead? The answer is yes – assuming that investing in shares is the right strategy for you given your long-term savings goals and your attitude to risk, there’s not much point in trying to second-guess short-term market movements. Indeed, trying to do so could cost you a great deal of money.

Nevertheless, it can sometimes be difficult to see past the headlines. Market conditions today are worrying, with bad news ranging from the slowdown in China to the uncertainty over the EU referendum. If you’re thinking about how to use this year’s individual savings account (ISA) allowance – or more generally about where to save and invest – you may instinctively feel that now isn’t the moment to bet on the stock market.

The cost of missing out

In which case, it’s worth looking at some data. An analysis just published by Seven Investment Management looked at the returns achieved by the UK stock market – as measured by the FTSE 100 Index - on the 5,056 trading days in the 20-year period to 31 December 2015.

Investors who put £10,000 into the market on day one of that period would have had £33,187 by the end of it, Seven’s calculations revealed, an average annual return of 6.18 per cent a year. But had they missed just the five best performing days over the 20 years, their final investment would have been worth only £22,317, an annual return of 4.1 per cent. The return fell to £17,170 (2.74 per cent a year) for those who missed the best 10 days and to £10,966 (0.48 per cent a year) for those who missed the best 20 days. Those who missed the best 40 days would have seen their starting investment reduced to £5,291 – a loss of 3.13 per cent a year.

The figures underline just how costly trying to time the market can prove. Get it wrong and your returns could be substantially lower – even if you only miss a handful of days.

Long-term savings pay off

One reason why missing only a few days of good returns has such a dramatic result is the power of compound interest – the effect of the missed returns is multiplied many times over for long-term investors.

You can see the same effect in a more positive light in data produced by the fund manager Fidelity, which reckons that savers who invest their ISA allowance in full each year can expect to be millionaires after less than 30 years. That calculation assumes that the investor puts £15,240, the maximum amount allowed, into an ISA and that the ISA allowance is increased by 2 per cent a year, in line with the Bank of England’s target rate for inflation.

Assuming average annual returns of 5 per cent after charges, such an investment pot would break through the million-pound barrier after 27 years and nine months according to Fidelity.

Where now for investors?

The message to draw from these figures is that for long-term investors who are prepared to accept the risk of some short-term ups and downs, the stock market represents a good option, even if investing right now, amid doom, gloom and predictions of more turbulence to come, feels rather too brave for many people.

Moreover, invest through a well-run collective investment fund, such as a competitively priced investment company, and you’ll get a professionally managed, diversified exposure to the stock market, which can provide protection from the worst of the volatility.