Fortune Tellers Stink And Market Timing Does Too
Have you ever been to a fortune-teller? Tarot card reader? A wizard? I will confess that I have not, but I know that it’s a tough business. The whole premise is they’re supposed to be able to predict your future, and from what I understand, the juicy parts come just after your next session (read: payment).
Trouble is, nobody can predict the future. I once saw Lebron James play basketball when he was in high school. I predicted he going to be average in the NBA because he was just kind of cherry picking after the game was well in hand. Turns out he was just bored. So I uh, was wrong. Really really really wrong. I digress.
Predicting the future when you’re investing is no exception. It’s impossible. Wall Street “experts” try to predict how an entire year will go and they still stink. Individual investors might get lucky here and there with market timing. But over time, they’re likely to bring themselves much less fortune if they listen to their emotions and guess if now’s a good time to invest or sell it all.
Sugar, We’re Going Down
Here’s a look at what happens to a client’s portfolio during the market decline at the end of 2018, depending on what action they took. The blue line shows you what happens if the client stays invested if they started with $1,000,000. That’s the ideal scenario. Batten down the hatches (I’ve always wanted to say this) and ride it out. The other colored lines show you what happens to the investor if they get spooked at various points and decide to avoid losses by employing market timing strategies.
If the investor rides the market as long as they can and finally capitulates at the bottom (red) by selling everything and then stays in cash, they’ve locked in a loss of $56,741 compared to what they started with, not to mention the subsequent growth of $42,046. So, their market timing cost them $98,787. Ouchy. Ouchie? Moving on!
If the investor also rides the market down to the bottom, also tries their hand at market timing and sells everything to cash, but waits it out a few days and finally reinvests when it’s “safe,” it still cost them $32,226 (purple).
Sources: Vanguard calculations, based on data from FactSet, as of February 28, 2019.
Notes: U.S. stocks represented by CRSP US Total Market Index. U.S. bonds represented by Bloomberg Barclays U.S. Aggregate Float Adjusted Index. Global stocks represented by FTSE Global All Cap ex US Index. Global bonds represented by Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index. The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index.
What if the investor decides they want out after the decline and anticipates another decline after some of the rebound (green)? They miss out on the market’s rebound and subsequent growth, thereby also making their losses permanent and giving up the growth, bringing the tab for their self-sabotage to $68,684.
If the investor also rides the market down to the bottom, also goes to cash, but waits it out a few days and finally reinvests when it’s “safe,” it still cost them $32,226 (purple).
All of this is to say that market timing is hazardous to your wealth. Trying to time the market when it’s going down is really hard (impossible) to do, and it is actually a very costly strategy to pursue. It’s better to identify an allocation that’s prudent for your goals, time horizon, and liquidity needs, and to stay invested. It is important to note that you don’t just sit there. This is a time to also be vigilant by rebalancing your portfolio, considering a Roth IRA conversion, and evaluating tax-loss harvesting opportunities.
Slow Money Is Better Than No Money
So far, we’ve (I’ve) discussed investors that are just “waiting for a pull back.” This is a common refrain I’ve heard throughout my career that they’re just sitting on loads of money waiting for the right time to strike. But how will they know when that right time is? And what are they giving up while they wait?
Turns out, quite a lot. If you missed 10 of the best days (only 10!) between 1/1/10 and 12/31/19, you’d have coughed up a third of your potential return. The market is open, on average, about 252 days a year. Missing 10 of the ~2,520 would cost you 33%. INSANE. It gets much worse too. You’d only have to miss another 10 of the best days to whittle your return down to 50% of what it could have been. Being invested for over 99.2%, but not 100% of trading days in that 10-year span cut your return in half. (Shouting now) STAY INVESTED. Days like Tuesday, 3/24/2020 are a great reminder of what you could miss out on. Tuesday was the largest single-day jump since 1933 when the Dow jumped over 11% in one day. As of this writing (1:00 on 3/26/2020), the Dow is now up over 20% in just the past three days. It’s hard to predict those big moves, and trying to look into the crystal ball or Tarot (not sure why I’m capitalizing them, they don’t deserve this much respect!) cards is costing you money if you’re trying to dance in and out of the market to avoid downturns and time the positive days.
So what should you do instead? If you’re already invested, make sure your allocation works for you and your goals, and monitor it for rebalancing or work with your financial planner (hi!) to make that happen.
If you’re not already invested and you’re looking at a growing savings account balance that you know you should be doing more with, book a time to speak with a financial planner (hi!) and we can work on setting up a plan to Dollar-Cost-Average into the market. You’ll use the market volatility to your advantage and build your wealth slowly rather than market timing.