Should I wait for the markets to pick up before investing?

After an extended period of high returns, the stock market took a tumble in the past month that has rattled some investors.

Despite the fall, those who are not new to the market are still likely to be well in the green with their finances. If you’d invested in the MSCI World index five years ago, as of 11 April, you would have still increased the value of your holdings by 158%.*

But if you’re new to the investing landscape, it can seem like a strange time to take the plunge, especially when so many investors are selling investments. The issue with this philosophy is that no one seems to be particularly good at knowing when the market is going to shoot up again, or when it’s going to drop down.

Historically, we have seen that the market has always recovered and continued to go up over time. But when that rebound happens is difficult to catch, and if you miss that upturn you could miss out on decent returns.

April has encapsulated this temperamental nature perfectly. On Friday, 4 April, the S&P 500 dropped by 6%. But on the following Wednesday, it increased by 9.5%. It’s continued its tumult since, but timing those days incorrectly could have resulted in significant losses. And this is not uncommon for a market drop. If we look at the best days for the market across the past 20 years, seven of the top 10 happened within about two weeks of the worst 10 days.**

If we think about those gains of the MSCI World Index in the past five years, it’s especially intriguing to consider when that period started. The beginning of April five years ago was just a few weeks into Covid-19 lockdowns. There was no clear idea of when, or even if, the pandemic would pass, and there was no clear process for how to carry on in the meantime.

But, people did carry on, even if it had to be from the safety of their homes for a while. And in turn, so did the stock market. Eventually, not only did the market rebound from the Covid-19 drop, but it rocketed past the starting point.

The circumstances of each drop are different, and so are the recovery times. But what has held true each time is that the index eventually bounced back and beat its previous peak.

It’s impossible to ensure that choosing to invest today will or will not give you better returns than investing tomorrow, or even a month from now. Over time, what has been clear is that the longer an investor is in the market, the better their returns have been.

But what if you did somehow pick the absolute worst time to invest? Even then, the returns can look pretty rosy. A study by Capital Group looked at two theoretical investors. One picked the best possible day of the S&P 500 (the market low) every year for the past 20 years to invest, and one picked the worst day each year (the market high) to do the same . At the end of the 20-year period, the investor choosing the best market days had an average annual return of 12.6%. But the investor who had the worst possible timing every year still had an average annual return of 10.8%.

Simply, time in the market beats timing the market accurately. Rather than basing your decision to start investing on the global outlook, it could be more important to review your personal goals and situation.

This could include your plans for the future, such as if you’re attempting to get on the property ladder or save for your children’s education. It may be better to just get started, rather than letting investing move back down your to-do list while you try to time the market. Ultimately, the sooner you can start, the better.

*Figures based on return of index and don’t account for fund or platform charges

**Source: JP Morgan