COVID-19 has wreaked havoc with the economy and your portfolio. If you’ve got your doubts in this moment, you may be wondering whether you should somehow shift your portfolio to higher ground until the coast seems clear. In other words, might these stressful times justify a measure of market timing? To address this common question we’re fielding right now, we wanted to share this video and found reminder below.
Here are four important reminders on the perils of trying to time the market — at any time. It may offer brief relief, but market timing ultimately runs counter to your best strategies for building durable, long-term wealth.
1. Market Timing Is Undependable.
Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. Even as recently as year-end 2018, when markets dropped precipitously almost overnight, many investors wondered whether to expect nothing but trouble in 2019. As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall, and 2019 was a great year for the markets.
2. Market Timing Odds Are Against You.
Market timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns.
3. Market Timing Is Expensive.
Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous.
4. Market Timing Is Guided by Instinct Over Evidence.
As we’ve covered before, your brain excels at responding instantly — instinctively — to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve.
Hypothetical Growth of $1,000 Invested in US Stocks in 1970
The impact of missing just a few of the market’s best days can be profound, as this look at a hypothetical investment in the stocks that make up the S&P 500 Index shows. Staying invested and focused on the long term helps to ensure that you’re in the position to capture what the market has to offer.
A hypothetical $1,000 turns into $121,353 from 1970 through March 17, 2020.
- Miss the S&P 500’s five best days and the return dwindles to $77,056. Miss the 25 best days and that’s $26,989.
- There’s no proven way to time the market — targeting the best days or moving to the sidelines to avoid the worst — so history argues for staying put through good times and bad.
Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In US dollars. 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 stocks in the S&P 500 at the end of the missed best day(s). Returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. Performance data for January 1970–August 2008 provided by CRSP; performance data for September 2008–March 17, 2020 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.