How investors generate fantastic returns, even with lousy timing

History shows that markets have a knack of recovering from sharp falls – as long as you have time on your side and a balanced portfolio.

interactive investor offers free monthly (regular) investing on everything – direct equities, funds and investment trusts

In March 2000, the Nasdaq index of leading tech stocks peaked – before beginning its descent. 

It is an almost earie coincidence that the 20th anniversary of the tech peak and bust coincides with the sharp falls in global markets over fears of the coronavirus – although this time there’s far more at stake than just markets.

Keeping calm and carrying on might be difficult for investors when it is their retirement nest egg on the line, but history shows that markets have a knack of recovering from sharp falls – as long as you have time on your side– and it’s important to have a balanced portfolio.

Research by interactive investor, the UK’s second-largest direct to consumer investment platform, found that a £1,000 investment in the FTSE All Share and MSCI ACWI Index at the end Feb 2000, just before the dotcom bust, would have grown to a £2,037 and £2,907 to 14 March 2020 - a gain of almost 104% and 191%, even after recent falls.

While 20 years is a long time, it includes a recovery from both the dotcom crash and the global financial crisis and is an example of the benefits of long-term investing, particularly when the original £1,000 investment would have initially fallen to £708 and £627 at the end of October 2002.

If you’d have given up after five years and sold at the end of Feb 2005, your investment would have fallen to £984 and £809 respectively.

During this period (2000-2005), regular investing might have been a better call. 

A £50 monthly investment in the FTSE All Share starting at the end of February 2000 to the end of February 2005 would have grown to £3,481, and £3,121 for investments in the MSCI ACWI index. The lump sum equivalent, invested at the beginning of the period (£3,000), would have fallen to £2,953 and £2,425 respectively over the same period.

Regular investing also did better from the end of February 2000 to the end of February 2010, when investors had to grapple with the bursting of the dot com bubble and the global financial crisis. A £50 monthly investment in the FTSE All Share would have generated £7,849 and the MSCI ACWI Index would have generated £8,041 over the period, while the lump sum equivalent (£6,000) would have grown to £7,748 and £7,019.

Global financial crisis

A £1,000 investment in the FTSE All Share and MSCI ACWI Index at the end of September 2007, when markets were near their highest levels before the crash began, would now be worth £1,425 and £2,483 (to 14 March 2020), a gain of 43% and 148%. 

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “It’s hard to see the light at the end of the tunnel given the abject mood shrouding global markets amid sharp downturns. Whilst none of us have a crystal ball, patient investors have been rewarded over the long term, and even if your timing was lousy, this data suggests that it’s time, not timing, that is the most important.

“A good way to mitigate investment risks is to drip feed your investments to help smooth out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low, smoothing out some of the stomach churning highs and lows in the price of shares.”

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “History shows that markets can and do recover from dramatic falls. Some of the best years can follow some of the worse, so it’s worth hanging on in there. The most important thing to do is to make sure you are comfortable with your risk profile and have a balanced portfolio. Regular investing can help remove some of the worry about market timing, and this year, interactive investor made regular investing free.

“It is far from serendipitous that the milestone anniversary of the dot com peak falls around the same time as the recent market falls. It took 15 years for the Nasdaq to surpass its dotcom peak, which it did in April 2015, but a portfolio that is diversified across different assets classes, sectors and geographies helps to reduce investment risk and should recover from market downfalls more quickly.”