Benefiting from Your Time in the Market, NOT Timing the Markets
Written by-Ryan Bouchey, CFP®, CPA
Although the stock market has not had a strong start to 2014 compared to the strength we saw in 2012 and 2013 when the S&P 500 was up 11% and 6.5% respectively in the first quarter, this is not a signal to dramatically change your investment approach in hopes of timing the market. It is important to remember that in many ways 2013 was a unique year for the markets including the fact there were only 17 days where the market was down 1% or more compared to 32 times in an average year. It was also the case that the market was never down for the year-to-date performance and the two largest pullbacks for the year were only 5% – well short of a 10% market correction. In fact, as investors, we have gotten accustomed to lower volatility recently with the S&P 500 going approximately 29 months without a true 10% market correction, dating back to the fall of 2011.
Due to the fear of a potential correction and the volatility we have already experienced in the 1st quarter (we have already had a 6% pullback in 2014) what should keep investors from trying to time the markets in an attempt to avoid any losses?
The answer lies in the chart below from JP Morgan showing the S&P 500 returns for the 20 years ending December 31, 2013. Even though we experienced two substantial bear markets during this time (Tech bubble of 2000 and the Great Recession starting in 2008), the S&P 500 had an annualized return of 9.22% for the 20-year period which would have grown your original investment close to 6-times larger. During these 20 years if you were out of the market for just the 10 best days, your overall return on the original investment is reduced in half and your realized annual rate of return is 5.49%. If you missed the 20 best days, your annualized return drops even further to 3.02%.
Timing the market is nearly impossible for even the best active money manager, let alone the average investor. The markets can take a turn for unforeseen reasons, for example the Ukraine – Russia geopolitical issues we are currently experiencing. Over time, the best way to navigate volatility and down markets has been a diversified portfolio and staying disciplined to your investment principles. By adhering to this strategy you will greatly benefit from your time in the market and by not trying to time the markets.
