The debate is over: Time in the investment market triumphs over timing the market

The importance of compounding interest can never be underestimated, and it is frequently hailed as a potent force that can turn small investments into large fortunes. Given its significant impact on both investors and borrowers, compound interest was dubbed the “eighth wonder of the world” by Albert Einstein.

What compounding means

Compounding returns can be explained as earning returns on your original investment as well as on its subsequent returns.

In a world of instant gratification, investors need to develop and maintain patience. It takes discipline and patience to achieve your financial goals and long-term financial success, and we have the evidence to back this thinking.

The numbers don’t lie

Taking a look at how a retirement investment grows over 40 years, let’s assume the investment starts with a R500 monthly debit order that increases by 6% per year over the 40-year period. The investment also grows at 8% per year over this period.

Source: Glacier Research

It may surprise you to learn that halfway through the 40-year investment period, you will probably have accumulated only around 12.6% of the final investment value.

Interestingly, you only reach half of your final cumulative investment value in year 33 of 40 (or 82% of the projected period).

This means that you get most of your investment growth in the final years of your investment. In fact, you accumulate 50% of your final investment value in the last seven years or just 18% of the total investment period.

This really highlights the power of compound growth and supports the statement that it is the eighth wonder of the world. Like with everything in life, though, there is always a “but”.

In the case of compounding growth, three things are true:

1. You need time.
2. Time is your best friend in investing.
3. The longer you invest, the more profound the compounding effect becomes.

Emotion has no place in investing. Patience is key to investing.
When looking at the following set of data, it also shows that you need to take emotion out of investment decision-making.

The graph below shows the investment returns of the JSE All Share Index from 1997 to the present, and how trying to time the market can have a significantly negative impact on your investment returns. A hypothetical investment of R100 000, with no sales or withdrawals over the roughly 28-year period, would be worth R3 100 000 today. Now, imagine if you were a fairly active investor that regularly switched investments and/or sold out/bought into the market, and you missed the JSE All Share’s top five performance days. Missing just those days would leave you with R915 000 (almost 30%) less at the end of the period, than if you had remained patient and fully invested. Further illustrating the point, imagine you had missed the top 10 performance days or top 30 performance days.

Source: Iress

The above graph ends the debate. An investor should not be trying to time the market, but rather spend time in the market.

Many believe that investing in the stock market is similar to gambling, but in actual fact, the opposite is true. In gambling, the odds turn increasingly against the player the longer they play, while the stock market has historically rewarded patience.

Over the last 96 years, through to the end of 2023, 94% of all 10-year periods have delivered a positive return for the S&P 500 Index. Those odds are unlikely in the gambling world (Public.com). History has shown that the longer the holding period, the greater the chances of a positive return/positive outcome.

This demonstrates that timing does not matter when you invest, but that investing your money over time is essential for generating returns.

Source: Investec Wealth & Investment
Article by: Stefan Cloete, Junior Research & Investment Analyst at Glacier by Sanlam
Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.