2 surprising reasons why doing nothing could make you a more successful investor

Although investing can be an integral part of growing your wealth over the long term, it is a subject that can make some nervous – and understandably so. After all, the stock market has fluctuated significantly throughout its existence, and the fear of losing money on an investment still rings true with many people today.

What’s more, as the cost of living crisis has made times tight for a number of UK families, worries over financial losses have become even more prevalent. 

According to the Mental Health Foundation, the cost of living crisis has contributed to 30% of adults having “poorer quality sleep”, and 23% are even meeting with friends less often to help cut costs. 

With this in mind, you may be preoccupied with “timing the market” in order to feel certain that the investments you make will return impressive profits.

Yet the truth is, there’s no such thing as the “perfect” time to invest. And, perhaps even more surprisingly, history tells us that staying put through market fluctuations can help you meet your targets over the long term.

Keep reading to find out two surprising reasons why doing nothing at all could actually be a more successful strategy for investors, even in volatile times.

1. Selling your investments during times of unrest can lead to significant losses

One essential way that sitting back and doing nothing can benefit your investments is that this approach can help avoid panic-selling.

Sadly, panic-selling is a common investment mistake that can result in significant losses. It describes becoming worried about the value of a holding when it decreases and deciding to cash in before its value dips any further.

Although tempting, panic-selling obliterates your chances of regaining what you invested in that particular asset. This is called “crystallising your loss”, and can cause you to make the temporary dip in your holding’s value permanent.

Ultimately, sometimes inaction is preferable to action. 

It’s understandable that you may not wish to witness your investments lose value before your eyes, but history tells us that markets typically recover after short-term dips. 

In fact, the stock market’s best-performing days have often happened just after, or during, significant downswings. 

As CNBC reports, the US stock market’s highest-returning day between 2002 and 2022 was 13 October 2008 – right in the middle of the worldwide financial crisis. On this day, markets returned 11.6%.

In a similar vein, the report also states that the third best day for the US stock market within that time frame was 24 March 2020. On this day, markets gained 9.4%, despite experiencing an overall decline due to panic surrounding COVID-19.

Sadly, not everybody held out for markets to improve during the turmoil of March 2020. According to Magnify Money, 42% of investors sold stock at the very beginning of the pandemic when markets became volatile. By September of the same year, 88% said they regretted the decision.

As such, even when the world seems to be turning itself upside down, your long-term goals are what matter most. If you’re tempted to panic-sell, remember that markets typically bounce back after periods of unrest.

2. Holding investments for longer has historically improved the chance of positive returns

Constantly chopping and changing your investment portfolio may not be conducive to favourable performance. Alternatively, holding onto your investments and building up a diverse portfolio over time could help you see more consistent returns.

In fact, a study by Nutmeg, spanning the time period between January 1971 and July 2022, shows the clear financial advantage investors would have seen if they held their investments for longer.

The below graph shows how the chance of positive returns increased in correlation with the length of time over which an investment was held.

Graph showing the probability of positive returns and the holding period in years

The study revealed that: 

  • If you invested your money on any random day within the given time frame and held it for 24 hours, your chances of positive gains would be 52.4% – around the same odds as a coin toss.
  • Furthermore, if you held this same investment for a whole quarter, your chance of positive returns would rise to 65.6%. 
  • Keep the investment for a year, and your chance of seeing profits reached 70%.
  • Finally, holding onto the asset for 10 years would push the chance of returns up to 94.2%.

Of course, no matter the time frame over which they are held, it is essential to remember that the value of your investments can fall as well as rise. Past performance is not a reliable indicator of future performance. 

Nevertheless, these historical examples clearly show how advantageous it could be to keep hold of your investments.

Rather than micro-managing your portfolio and causing yourself more stress, sitting back and leaving your existing holdings alone could actually make you a more successful investor.

Looking to expand your investment portfolio? Discuss your ideas with a financial planner

Whether you’re a first-time investor or you’re well-versed in the ups and downs of the stock market, creating an investment plan with a financial planner can help put your life goals into action.

I can listen to any worries you may have about market volatility, and provide expert advice on creating a diverse portfolio of assets over a time frame that suits you.

To learn more, email me at a.douglass@grosvenorconsultancy.co.uk or call my office on 01793 766 123. Alternatively, call my mobile on 07525 177 046. 

While I offer high standards of service and will work with you to ensure any plan is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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