Time in Beats Timing…in the Market

May 26, 2016
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As I have said many times to clients: “Timing the Market is a Losers Game.”  Why should I say this, because, “market timing” to be successful requires an ability to forecast the future correctly; not only once but consistently in the future. It requires an investor to know when to leave the market and when to re-enter the market.  Additionally, to trade in to and out of the market increases trading cost and tax expenses.  Popular indicators (metrics) tell us very little about the near term direction of the stock market---so how can we forecast the market?  Thus, forecasting the future is nigh impossible.

Let me share with you some results of a 2014 Morningstar study.  The results are compelling.  If market timing doesn’t work, what’s the alternative?  It’s a simple strategy.  And, that is to stay invested.  Going back to the 1920s, equity (stock) returns have been positive in 95% of all rolling 10-year periods and 100 % of 20-year periods (see chart 1, below):

Equity returns in calendar-year periods from 1926 through 2015*

Source: Morningstar. *As represented by the Ibbotson Associates SBBI Large Company Stock Index (calendar years ended December 31).
The historical data are for illustrative purposes only, do not represent the performance of any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is no guarantee of future results.

Looking at just the last 25 years (about 6000 days), an investor who tried to time the market and missed the 10 best days finished with a portfolio that was half the size than if he or she had remained invested throughout the entire period (see chart 2 below):

Investors who didn't stay in the Market lost out.

Hypothetical growth of $10,000 investment in the S & P 500 for indicated periods.

Source: Morningstar.
The historical data are for illustrative purposes only, do not represent the performance of any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is no guarantee of future results. Rather than trying to predict highs and lows, it’s important to stay invested through a full market cycle. Focus on the time you stay invested, not the timing of your investments.

Markets reward those who stay invested.  It’s time spent in the market---not market timing---that may help build wealth. 

When an investor combines staying in the market with sound asset allocation can seek to build wealth over time.

Closing 

The above reference Morningstar study, just underscores the need for a long-term, balanced, well diversified portfolio with the strategy of staying the course with discipline.  To repeat: “Market timing is a fools game.” 

We thank you for your continued trust and loyalty.

 

Information contained within this report has been compiled from Morningstar, S&P 500 Index, Ibbotson Associates SBBI Large Company Stock Index and Lord Abbett. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations(s)for any individual.  To determine which investment(s) maybe appropriate for you consult your financial advisor prior to investing.  All performance reference is historical and is not a guarantee of the future results.  All indices are unmanaged and may not be invested into directly.  Advisory services offered through SWAG, Registered Investment Advisor. 

Investing involve risk including potential loss of principal.  Economic forecasts set forth in the presentation may not develop as predicted. 

No strategy can ensure success of protection against loss.  There is not a guarantee that a diversified portfolio will enhance overall returns or out perform a non-diversified portfolio. Diversification does not protect against market risk. (Tracking #1-499249)