With the market volatility continuing in February, it’s worth considering how investment companies have performed in the past during difficult markets.  Of course, no-one knows for sure how markets are going to perform this year, but we have looked at how investment company investments at the start of previous bear markets have performed.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC) said:  “Clearly market timing can have a significant impact on returns but it’s very difficult to get right. The market is currently significantly down on its April, high but the data demonstrates that long-term investors who invested in investment companies close to the market high and then held on through the bear market have received positive returns.

“An investment in the average investment company prior to the credit crunch bear market is still up 53% today. Whilst lump sum investing has outperformed monthly investing over the long-term, there is not much difference in performance between the two types of investing since the credit crunch.  Regular investing can be a useful way of reducing your risk profile because investors buy fewer shares when prices are high, and more when prices are low.  Over much longer time periods, because lump sum investments have more money working from day one, it’s not surprising to see lump sum investing outperforming strongly.”

Lump sum investment at start of bear markets

The FTSE 100 reached a high in December 1999 but in 2000 the tech bubble started to burst, with the market entering a period of decline. A lump sum investment of £1,000 in the average investment company at the beginning of this bear market at the end of February 2000 would now be worth £2,680 (end January 2016). Admittedly this is nearly sixteen years later but it does illustrate the value of investing in investment companies for the long-term.  Indeed, that same investment would have fallen to £660 in October 2002, around the time of the market low, before ‘bouncing back’ to its current value today.

At the height of the economic boom, on October 15th 2007 the FTSE 100 reached 6751.7 but then the credit crunch and associated bear market began. A lump sum investment of £1,000 in the average investment company at the end of September 2007 when markets were near their high would now (end January 2016) be worth £1,530, eight years and four months later. The same investment at the end of February 2009, around the time of the market low would have been worth £580, once again illustrating how important it is to take a long-term view.

Lump sum investing beats regular saving over long-term but it can be close

AIC data suggests that even near the top of the market, on average, lump sum investment company investments are outperforming the equivalent amount fed into the market on a monthly basis over the long-term, but the figures are close. A £50 per month investment in the average investment company since the end of September 2007, prior to the credit crunch (a total of £5,000) has grown to £7,402 (end January 2016).   An equivalent lump sum investment of £5,000 in the average investment company over the same time frame would now be worth £7,671.

Over a longer time period the lump sum figures are a lot better than the regular saving figures. Whilst a £50 investment in the average investment company at the end of February 2000 prior to the tech crash (a total of £9,550) would now be worth £20,821 (end January 2016). The equivalent lump sum investment in the average investment company over the same time period would now be worth £25,564.

Share price total return

Source: AIC using Morningstar, whole industry ex 3i, ex VCTs