Can you time the market?
Can you time the market?
As you can read from previous newsletters (learn how to make smarter, more informed financial decisions), our emotions can trick us during extreme market downturns and upturns. In the last ten years, since March 9, 2009, $100 invested in a simple U.S. stocks index fund/ETF would have become close to $500.
We have temptations to try to anticipate market movements and invest accordingly. Disciplined investing is difficult during time of volatility. From the late September 2018 to Christmas, U.S. stocks went down 20% and then, they went back up 20% (as of early March 2019).
Below are two analysis showing the impact of failed market timing during 1970-2015 and 1997-2016.
Good days in the market are unpredictable. Ten of the top 25 days occurred between September 2008 and December 2008. But the S&P 500 dropped 28.9% during that time.
We believe that market timing is a coin flip and daily market returns are random.
If you missed the best day during 1970-2015 (more than 11,000 trading days), your retirement assets would have been 10% lower.
If you missed the best 15 days, your retirement assets would have been 60% lower!
In addition, timing can increase your costs – especially taxes.
Dalbar, a financial market research firm, examine returns investors received. They find over the past 30 years, investors in equity funds have lagged the S&P 500 benchmark by an average of 7.27% per year, on average (11.06% for the S&P 500 vs. 3.79% for the investor in equity funds).
A hypothetical investor with $100,000 would watch their investment grow to $305,257 (before taxes) over 30 years at a 3.79% annual rate of return. That same investor, earning 11.06% per year, would end up with $2,326,645 -- more than 7 times as much!
The average mutual fund investor has not stayed invested for a long enough period of time to get the rewards that the market offers disciplined investors. See the 15 biases that make you a bad investor.
Learn how to make smarter, more informed financial decisions
At BFM, we help you make better financial decisions so that you can have peace of mind.
Our core beliefs are:
• Asset Allocation is the most important determinant of performance
• A globally diversified portfolio reduces risk
• A disciplined investment process is critical
BFM enables you to increase your wealth through independent financial advice with no conflict of interest. We neither sell products nor receive commissions.
This newsletter was first published in April of 2019