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Stay the course: Why time in the market beats timing the market


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Events this year sparked by COVID-19 have shown how volatile investment markets can become over short periods of time.

And you may be asking, "Is it safer to cash out during volatile times and buy back in when markets settle down?"

That's understandable, but there's an old investment saying which is always worth keeping in mind: Time in the markets beats trying to time the markets.


In other words, investors who stay the course over time have a much better chance of achieving investment success than those who try to pick when to buy and sell. That's generally a losing game given the daily changeability of markets.

And a great way of illustrating that is to look at how different types of assets have performed over the last 30 years.

The recently released 2020 Vanguard Index Chart below tracks the performance of six different asset classes since mid-1990: Australian shares, US shares, international shares, listed property, Australian bonds and cash.

It records all the ups and downs of the markets, taking into account the major market falls related to the Asian financial crisis in the late 1990s, the dot-com crash in 2000, the global financial crisis in 2008, and most recently the impact of the COVID-19 pandemic.

graph vanguard index chart

Using a base amount of $10,000 invested into each asset class on July 1, 1990, the chart shows what that initial investment would have been worth at June 30, 2020, had all the returns earned along the way been reinvested - such as share dividends and interest payments.

For example, if you'd invested $10,000 into the broad US share market in 1990, it would have achieved a 10.3% average annual return and grown to $186,799.

Over the same time frame, $10,000 invested into the Australian share market would have delivered an 8.9% per annum return and risen to $130,457.

Had $10,000 been left in a cash account over the last 30 years, it would have grown to just over $44,000 based on a lower average annual return of 5.1%.

That's not to say one asset class is better than the other. Returns from assets will always vary from year to year, and over time, for a range of reasons.

Cash, because it is such a low-risk asset, typically delivers lower returns than assets with higher associated risks such as shares.

Which is why spreading your money across different types of investments is so important, because that will help smooth out your returns and reduce your level of risk over the long term.

Accelerating your returns

As the $10,000 chart example shows, investment returns across all asset classes will compound when more funds are added to the initial investment balance. In this case, the additional funds were earned company dividend distributions and interest payments from bonds and cash.

But how would the numbers look if an investor had kept adding to their initial investment with regular monthly contributions over the last 30 years?

Investing the same amount at set intervals is known as dollar-cost averaging. This is because it averages out the cost of investments, regardless of whether market prices are up or down.

The chart below is based on a zero starting balance and uses actual market returns in conjunction with four different regular monthly contributions strategies since July 1, 1990. It also assumes the reinvestment of all distributions.

Investing $250 a month into Australian shares, irrespective of market movements, would have achieved a balance of more than $443,000.

Anyone with the financial capacity and discipline to invest $1000 a month over the same period would have grown their balance to more than $1.77 million.

How extra investments add up over time

graph anxex charts
Source: Andex Charts Pty Ltd. Data based on annualised returns since 1990.

Of course, a more realistic pattern for most people is to increase their investment contributions over time as they earn higher wages and other expenses fall.

Even a low initial balance will grow substantially over time when combined with compounding investment returns.

Successful investing revolves around having a well-planned and diversified strategy, keeping investment costs low, and the discipline to tune out from the daily market noise, even during volatile investment times.


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Tony Kaye is senior personal finance writer at global funds management group Vanguard Investments. He has held senior roles on The Australian Financial Review, The Australian, The Age and The Sun.
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