Investing for the Long Run

3 April 2018  |  Dr. Ella Rabener
Investing for the Long Run
The rewards of a long-term investment strategy can outweigh the risks of short-term market instability.
Exiting all investments during times of market turmoil is a common mistake of investors that can harm their long-term returns.

The past month may have felt like a turbulent time to be invested in capital markets but the extent of fluctuations was not out of the ordinary. Obviously investors would love for the markets to stay positive forever, with no bumps in the road, but if there were no risks involved, investing in the capital markets would not deliver higher long-term returns than keeping your money in a savings account.

This chart illustrates how a long-term investing approach typically translates into higher returns than reacting to adverse market conditions by exiting your investment. Of course, this argument applies only to globally diversified portfolios rather than bets on individual stocks.

The Importance of Staying Invested: Example 2007/08

Performance of three different investment strategies when investing £100k in the MSCI World.

Performance of three different investment strategies when investing £100k in the MSCI World

The market is represented by the MSCI World Index in GBP. Cash is represented by the historical average of the monthly interest rates of branch-only deposits. From 2012 on, the average is based on online sterling cash ISA deposits excluding unconditional bonuses from households. Data assumes reinvestment of income and doesn’t account for taxes or transaction costs. Source of information: Bloomberg, own calculations.
Past performance or future projections are not indicative of future performance.

If you invested £100,000 into the MSCI World, which tracks the performance of over 1,600 shares across 23 developed markets, at the beginning of 2007 and stayed invested during the crisis, you would have had £258,000 at the end of 2017. If, instead, you sold everything when the market hit bottom and entered it again a year later, you would have ended up with just over £160,000.

But if you sold everything and did not reinvest, you would have ended that same 10-year period with just over £70,000. This means you would have potentially missed out on £188,000.

A long-term strategy is key

We believe it is important for investors to keep a long-term perspective. Markets can go down as well as up, which is why we recommend you think of investing as a long-term choice to ride out short-term volatility. You can read more about long-term investment strategy in our post ‘Timing the Market or Time in the Market?

At Scalable Capital we understand how difficult it can be to remain invested during periods of volatility, but we’re not asking you to have the nerves of steel required for such a simplistic “buy & hold” strategy: Our risk management technology monitors the markets for you and will adjust your asset allocation if a sustained changed in the risk regime is detected.

Image: Unsplash.com/ Tim Wright

Risk Warning – With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance. We do not provide any investment, legal and/or tax advice. If this website contains information regarding capital markets, financial instruments and/or other topics relevant for investments of assets, the exclusive purpose of this information is to give general guidance on investment management services provided by members of our group. Please note our Risk Warning and the Website Terms.

 

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Photo Ella Turquoise Circle
Dr. Ella Rabener
CMO & UK CO-FOUNDER
Ella combines finance expertise, completing a doctoral degree in business and advising leading financial institutions while working with McKinsey & Company, with several years of experience building e-commerce startups, most recently as founder and CEO of Westwing.ru.