Little and often over the long term

I wanted to share this graph with you as it helps illustrate a number of financial planning points.  The graph comes after a client brought in a bunch of paperwork for financial products they took out mid career because they were told, it was a good thing to do.  They just kept investing regular sums.  On opening their annual investment statement, they discovered that the unit price of the fund had fallen and seeing only the snapshot of falling prices over the last year, it was only natural to feel concerned. 

Graph showing the changing unit price over time of  the Teacher's Managed Pension fund March 1993  - Dec 2022 Source : FT online 

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I wanted to share this graph with you as it helps illustrate a number of financial planning points.  The graph comes after a client brought in a bunch of paperwork for financial products they took out mid career because they were told, it was a good thing to do.  They just kept investing regular sums.  On opening their annual investment statement, they discovered that the unit price of the fund had fallen and seeing only the snapshot of falling prices over the last year, it was only natural to feel concerned. 

From the graph we can see that in the short term the unit price has fallen back from a high of £10.40 in November 2021 to close at £9.42 on 12th December 2022.     But what if we took the long view.......  click on the read more function bottom right, to find out more.

At the beginning of the investment term, in this case, March 1st 1993 the unit price in the fund  was £1.54.   Now let's assume our client invested £500 in the first month,  that would be 324.67 units bought, which at today's unit price of £9.42, would give a value of £3,058.44.  If we take away the original £500 investment that's growth of 511% . Repeat this the next month in April 1993 when the unit price has fallen back to £1.52 and our client has bought 328.95 units, valued today at £3098.77,  take away the original £500 and that' s a 519.75% growth and so we go on to today. 

As we get closer to December 2022, units bought in December 2020 will have had less time to grow, £500 invested on 1st March would buy 56.31 units priced at £8.88.  Currently this would be valued at 56.31 x £9.42 or £530.41 or  6.8% growth.      

Just a note here that in reality,  we need to take into account the effect of investment fees and inflation, to give the real  increase in value of the investment over time but hopefully this gives you a strong example of how important the time horizon is and how important it is to start investing as soon as you can.  
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Image credit :  Yiorgos Ntrahas 

Not only  does the graph illustrate the benefits of investing over the longe term, we can also see the importance of  staying invested.   

According to recent data analysis from the New York Stock Exchange the average time for holding a stock is  5.5 months perhaps this is due to increased technology or herd mentality and the fear of further losses but investors are increasingly taking a short term view.  In the 1950s  the average time for holding a stock was  8 years.  ( Lake R, April 20 2022 :  What is the average stock holding period ? : Yahoo Finance ) 

What would have happened ​if our client had bailed after the Tech Bubble Burst in 2002 or after the subprime Financial Crisis of 2008 or the Covid sell off in 2020 ?  The graph shows the falls in unit prices during these times.   They may still be in cash,  flat lining  and paralysised with fear and indecision whilst waiting "for the right time" to invest again. During this time they would have missed three strong periods of recovery and they would also have missed buying more units for their regular investment when prices did fall.    

In an online article addressing why investment matters, the London Stock Exchange notes "although 'these' investments may be more volatile than money in the bank, investing over a longer period provides an opportunity to recover from any short-term falls and benefit from any rise in the market."  

In Conclusion: 

• know your time horizon and start investing as early as you can 
• invest for the long term 
• stay invested
• if the investment remains suitable, a fall in price could be a time to buy more for a given level of investment 
• invest regularly, you will sometimes buy more units for your given level of regular investment 
• be disciplined 
• have an emergency fund so you don't need to cash in your investments at a time when prices have fallen
• remember a fall in value  is only a loss when you sell. 

This article is written as an information piece, by a regulated financial adviser,  to help anyone reading it, to make better sense of the world of investments and to help make more informed decisions.  It is not intended as investment advice or as a promotion of the Teacher's Managed Pension Fund, which incidentally is closed to new business.   

Investments and the income from them can go down as well as up and capital is  at risk. Past performance is not an indication of future performance. 

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