Why It Could Be A Good Idea To Stay Out Of The FTSE 100 Until November

As we head for the Easter Holidays, and the welcome break (for some) of 4 days off work, I find that it can pay to take advantage of the 4 days when the FTSE 100 isn’t trading to conduct a proper review of where I think the market is travelling, and the events that could cause some real volatility and have a detrimental effect on my portfolio as we move through the year.

Uncertainty abound

As shown in the chart below, we can see that the index hasn’t been the same since breaching the 7000-point mark back in April last year. Indeed, it wasn’t long after that all-time high when volatility struck the markets, eventually leading to a bear market, followed in March by a huge bounce, which seems to be quickly running out of steam as I type, possibly as investors take  profits before Easter.

The problem, at least to my mind, is that there are major events over the course of the coming year which could see markets crash further if the results are not as hoped. Of course, I’m talking about the upcoming referendum on whether Britain should remain in the European Union or not —  to be held on Thursday 23 June — and the US Presidential elections — currently scheduled to take place on Tuesday 8 November.

Investors don’t have to look far to gauge the views of any number of high-profile investors or business leaders, and more importantly for investors, the effect that it will have on the UK stock market.

And, though I am neither, I’m quite happy to throw my hat into the ring with my prediction: I think that the FTSE 100 will move significantly dependant on the result of the referendum and again once the “Leader of the Free World” is decided.

If the results are what the markets want, we could see a huge relief rally heading into December – however – that is a big if!

A very different view

You see, while it true that when you’re not invested you will dodge some of the market’s worst days, it is also true that you also risk missing out on the markets best days, too. It is this that can seriously damage your returns.

While not directly related to the FTSE 100, I have been to several presentations now where speakers site an interesting study from JP Morgan Asset Management released in 2015. This report showed what happened when investors missed out on the market’s 10 best days between 1995 and 2014. 

An investor who stayed fully invested during those 19 years would have achieved an annualised total return of nearly 10%. But an investor who missed the 10 best days in the market would have seen their annualised returns fall to just over 6%.

While that may not seem the end of the world to most, it is well worth looking at it in a slightly different way:

An investor who put $10,000 in the US market would have made $55,000 by being fully invested without any selling or additional buying over those 19 years. However, had if they had missed the 10 best days they would have made only $23,000 – that’s a sizable difference, and illustrates that those of us who try to time the market are at risk of missing out on huge potential gains.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.