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How time in the market helps manage risk


Determining the best time to enter or exit a market can be difficult for even the most experienced investor. Here we analyse why time in the market rather than timing the market can help to manage risk and improve the outcome of your portfolio over the long term.

Over the past 20 years, the short-term performance of international share markets has been volatile. Markets have risen in most years but have also gone backwards on occasion. The best year was 2013 when markets rose 43.0% while the worst year was 2002 when shares lost more than a quarter of their value.

One-year returns of international share markets, 1994 – 2013

Source: MSCI World ex-Australia Index ($A unhedged). Data as of 31 December 2013.

Over five-year periods, the performance of international share markets has been more consistent than over one year periods. Over the past 20 years, markets have produced positive five-year returns on 13 occasions.

Five-year returns of international share markets, 1994 - 2013

Source: MSCI World ex-Australia Index ($A unhedged). Data as of 31 December 2013.

Over 10-year periods, the performance of international share markets has been even more consistent than the performance over one and five-year periods. Shares are not without risk however. This is demonstrated by the impact of the Global Financial Crisis on the 10-year periods ending 2008 to 2011. In all other 10-year periods, international share markets have performed very well.

10-year returns of international share markets, 1994 - 2013

Source: MSCI World ex-Australia Index ($A unhedged). Data as of 31 December 2012.

Conclusion

While it can be tempting to sell out of your investments when they are underperforming, the above data highlights that investors who attempt to time the market can miss out on some of the biggest market bounces. Over the long term those who remain fully invested are best placed to reap the rewards from the market’s positive years.



Act now for a better tomorrow

To learn more about how to build your wealth and investing, speak to your financial adviser or explore our range of investment options.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

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