By Ryan Graves on Nov 11, 2019

Why Timing the Market is so Risky
Markets process information very quickly.  In 2018, the average daily volume of equity trades was around $462.8 billion, which implies that markets adjust rapidly to any news or information.  By the time an investor has the time to react to new information, it has most likely already been incorporated into prices by the market.  

Timing the Market Increases Risk
Investors attempting to pick the top (or bottom) of the market must get the timing right twice—when to get out (or in) and when to get back in (or out).  If the expected return of the market is always the same (it is), trying to time the market significantly increases the risk for the same level of expected return.

Top of the Market?
Anytime the market hits a new high, conversations around an office can be heard discussing “the top” or “due for a downturn” or “might be a good time to sell.”  However, after a market hits a new high, the market yields positive annualized returns over one, three, and five-year periods.

Intra-year Declines
What about declines mid-year? Over 40 years, the average intra-year decline was about 14%, and about half the years observed had declines of more than 10%, and about a third more than 15%.  Despite these intra-year drops, calendar year returns were positive in 33 out of 40 years observed.  Market declines are common, so it is crucial to stay disciplined.

 

Reacting Can Hurt Performance 
A substantial portion of the total return from equity markets come from just a handful of days; missing out on those days can be detrimental to an investor’s portfolio.  The chart below shows what missing out on the best performing days of the S&P 500 Index from 1990-2018 would yield.

    

What You Can Do
Develop a well thought out investment plan with an investment advisor ahead of the inevitable market volatility.  Working with an investment advisor to develop a strategy that meets your risk and return objectives dramatically increases the likelihood you will maintain your discipline in volatile markets, increasing your chances of long-term success.  

 

Disclaimer  

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Bemiston Asset Management, LLC., unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

This website may provide links to others for the convenience of our users.  Our firm has no control over the accuracy or content of these other websites.

Sources: Dimensional Fund Advisors

 

All charts in US Dollars.

New Market High:  Past performance is no guarantee of future results. Declines are defined as months ending with the market below the previous market high by at least 10%. Annualized compound returns are computed for the relevant time periods after each decline observed and averaged across all declines for the cutoff. There were 1,115 observation months in the sample. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

Market Decline more than 10%:  Past performance is no guarantee of future results. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,115 observation months in the sample. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

You Should Fear Missing Out:  For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results