Don’t try to time the market – here's how to get rich slowly with investment trusts

Everyone wants to buy low and sell high. But that's easier said than done, says Max King. The best advice is to focus on the long term and ignore the market swings.

Slowly does it... © Getty
(Image credit: filipfoto)

Investors agonise unnecessarily about timing their investments. Nobody wants to be the fool that bought at the top, but it is human nature to be carried away by the euphoria of a rising market, projecting past returns indefinitely into the future.

Similarly, everyone wants to buy at the market low but that is easier said than done. With markets plunging, confidence falling, the consensus of media experts gloomy and corporate profits on the slide, it is easy to delay, waiting for better news and hoping for even lower prices.

When markets suddenly rally, inevitably well before the news has improved, it is equally difficult to chase a rising market. The best advice is to focus on the long term – and hence target “time in the market, not timing the market”.

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It’s very difficult to time the market – so don’t try

Studies regularly show that, because the long-term trend has been upwards for at least 100 years, consistently buying at market highs is actually a profitable strategy provided that you don’t then panic out at a subsequent low.

Markets are volatile and that volatility is what scares many investors away from the excellent long-term returns. In the last 50 years, UK equities have generated compound annual returns of 5.5% ahead of inflation.

Yet those returns are concentrated in remarkably few days. Missing the best ten days in the US market in the last 20 years would have halved your returns; miss the best 25 days in the last 30 years and your returns would be little better than for cash.

Those big up days occur when they are least expected, especially when markets turn. In early 1975, UK equities, having fallen 70% in two and a half years, jumped 50% in a week and doubled in a month. Buying on the way up, let alone at the low, was impossible.

Market swings in the last ten years have been considerably less drastic, with corrections of 20% rare. Waiting for one could mean missing out on a lot of upside in the meantime, with no certainty, even if a correction then occurs, that prices will return to the levels previously rejected.

The best an investor should aim for is to hold back when the markets have risen too far in the short term, and treat any setback that is accompanied by media gloom and pessimism as a buying opportunity. Strategist Ed Yardeni has counted 66 such panic attacks since 2009, all quickly recovered.

The low-stress guide to managing your portfolio

Few investors can resist checking prices regularly after purchase, only stopping when the purchase is firmly profitable. But thereafter, checking more than once a month is unnecessary; if you are not going to trade it, why bother?

A monthly price check on a portfolio gives a good perspective on overall performance compared to the market, and may highlight under-performing investments. Maybe the manager of the trust has changed, or lost his or her touch, or perhaps was just riding a favourable market tide.

These investments may need culling. It’s possible that the trust is going through a bad patch and that performance will rebound – but don’t count on it. It’s also possible that you made a mistake, bought a dud and need to sell. Everyone makes mistakes, but only seasoned investors recognise them.

On the other hand, while “nobody ever went broke taking a profit” is a popular saying, it’s one to be wary of. Taking a profit and reinvesting in a loser is a poor strategy. Well-managed investment trusts with a diversified portfolio are much less likely to fall flat on their faces than individual companies, while trying to pre-empt the ups and downs of the market is a mug’s game.

Occasionally, irrational exuberance may take over market sentiment, as in the technology, media and telecoms boom of the late 1990s. Those detached enough to spot it can head for the exit before the herd panics. The share price of Polar Capital Technology Trust exceeded £5 in 2000 before falling 80% in the next two years.

However, although it took 12 years to make a new all-time high, it has since trebled again. Hence the wisdom of Warren Buffett’s quip that “my favourite holding period is forever”.

Einstein is credited with saying that “compound interest is the eighth wonder of the world”, a saying that works better when applied to compound returns. Direct investors seek the elusive “ten-bagger”, a term applied by veteran investor Peter Lynch to companies whose share price had multiplied tenfold but, with patience, trust investors will discover them too.

Research analyst Winterflood Securities’ list includes nearly 50 trusts that have doubled your money in the last five years, and a few that have trebled. Most trust ten-baggers require a holding period of 20 to 30 years, but that is well within the investment span of a personal pension.

As F&C once advised in its marketing, “get rich slowly”. Trade only occasionally, expect volatility and stick like glue to good funds and fund managers. Don’t expect to do much more than ride out the ups and downs of the market, run the winners and cut the losers.

When the 18th century financier Nathan Rothschild was asked for the secret of his success, he replied: “I never buy at the low and I always sell too soon.” Timing isn’t everything.

Max King
Investment Writer

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.