Key Points:
- Market timing is less important than the duration of investment.
- Compound interest has the strongest effect when investments are reinvested over the long term.
- Missing the best days in the market can significantly reduce overall investment returns.
- Over a long-term horizon, the difference between perfect and poor timing is minimal.
Detailed Overview:
London, August 18 (FFN) – Recent weeks have seen significant turbulence in the financial markets, prompting many investors to consider when the best time to start investing might be. However, Peter Garnry, Chief Equity Strategist at Saxo Bank, emphasized in a recent commentary that the duration of investment is far more important than attempting to time the market.
Compound interest, which creates a snowball effect, is most powerful when investments are left to grow uninterrupted over the long term. As an example, Garnry mentioned an investment of $10,000 in the MSCI USA Total Return index in 1980. Assuming all returns were reinvested, this investment would be worth more than $1 million in 2024, representing an average annual return of 11.1%.
Garnry also warned of the risk that in attempting to avoid the worst days in the market, investors might miss out on the best days, dramatically reducing potential returns. Using the example of the S&P 500 index from 1991 to mid-2024, he illustrated that missing the 30 best days could have halved the annual return from 11% to 5.3%.
According to Garnry, the key is to start investing and maintain a long-term horizon. In most cases, the difference between perfect and poor market timing is only about 1% per year. While timing might be more critical in years with significant market volatility, predicting the ideal moment is extremely difficult, if not impossible.
Garnry concluded that if you extend the investment horizon to 30 years, the difference between perfect timing and bad luck is very small—only 0.3% annually in this scenario.
