The markets appear to have regained a little equilibrium after a turbulent few months. Whether this will last remains to be seen but this could still be a good time to reappraise your investments and revisit your long-term objectives.
If you have cash to invest then even though the market has picked up in the last couple of weeks there are still some good prospects. It may also be a good time to offload underperforming stock even if prices have not regained their former peaks. Selling at a lower price could also cut your capital gains tax bill.
At the same time, while prices remain off their peak, you can reinvest in more promising prospects. As Peter Hargreaves pointed out recently, cutting your losses and switching to something with better potential is sage counsel.
Furthermore, evidence that it does not necessarily pay to sit on your cash - or your losses - in the hope of improved market conditions has also emerged from research by fund manager Fidelity International.
Analysis of performance across UK and European equity markets over the past 15 years has revealed that relatively few trading days contribute to overall performance. Investors who missed the best 40 days during this period have much reduced gains or, in some countries, hefty losses.
A stake of £1,000 invested in the UK stock market in June 1992 would have been worth £4,612 at the end of June 2007, including the reinvestment of dividends if left untouched. Strip out the best 10 days and the value of the investment would reduce to £3,041. Miss the best 40 days and the stake would be worth just £1,304.
Richard Wastcoat, UK managing director of Fidelity International, said: 'It can be tempting during time of stock market uncertainty to delay making investment decisions or to sell existing holdings in the hope of buying back in when values are lower. In theory this is an attractive idea but it seldom works in practice.'
'Just as the sharp falls in stock markets tend to occur over short periods of time the best gains are similarly concentrated. Because these gains often occur just before or after a market fall - an investor who tries to avoid falls is highly likely to miss the best gains.'
'When markets fall understandably investors lose confidence and either stop investing new money or redeem their holdings. But the clear lesson from history is that if investors persevere, they should reap long-term rewards.'
He adds that investors worried about market volatility could consider a regular savings plan - gradually drip-feeding into the market regardless of the price on any given day. This is known as pound cost averaging and will help smooth out the effect of market changes on the value of investments. It's all about time in the market, not timing the market, he says.
The argument about staying invested for the long-term is reinforced by research in a widely quoted study based on the US S&P 500. It looked at the 30 years between 1976 and 2005 and found that the effect of missing the 10 best monthly and 20 best monthly returns would be disastrous.
Staying fully invested over the 30 years would have produced returns of around $36,000 based on a $1,000 initial investment. The effect of missing the 10 best months was that the returns were reduced to just below $13,000. The impact of missing the 20 best months was to see the returns reduced to below $6,000.
Since you're never going to know the best months for investment, except in hindsight, the message is clear - do your research, choose wisely and plan on staying in for the long term to maximise investment performance.
Danny Cox
Head of Financial Practitioners
