If you have an Apple Watch, then you certainly know it’s quite a revolutionary (yet mostly unneeded) device. More information than most of us need on our wrists. Who is texting me (usually one of my sons asking for money…) or the latest headlines and, unfortunately, how slow my running pace has gotten over the years.
If only my watch could alert me at the precise moment the market hits the top! (Wouldn’t that be nice…)
When markets are rallying or pulling back, it’s often very tempting to try and seek out the top to sell, or the bottom to buy. The problem is that investors usually guess wrong, potentially missing out on the best market plays. Does the cost of trying to time the market make a big difference in your returns? You bet it can.
For example, between 1986 and 2005, the S&P 500 compounded at an annual rate of 11.9 percent –even while weathering Black Monday, the dotcom bust, 9/11, and various booms and busts. Over that period, $10,000 invested in 1986 would have grown to over $94,000 (not taking into consideration fees and expenses inherent to investing).
However, according to a recent Dalbar report, the average investor’s return during that period was just 3.9 percent, meaning that same $10,000 grew to just over $21,000. Why? One reason is trying to time the market. The average investor may miss out because their money tends to come in near the top and come out at the bottom. Investors are notoriously bad at picking the right time to enter or exit investments; by the time an opportunity is on their radar, the “smart money” is usually nearly ready to get out. The problem is that equity gains can often be made in a very short amount of time. If you’re not in the stock when it moves, you may miss out on the whole play.
The bottom line is that it’s virtually impossible to accurately find the top or bottom of the market, and no one can do it consistently.
So what am I doing? Well, it’s interesting. Investors are told to stay invested because missing just a few days with huge upside moves can destroy your returns. That makes sense, however that advice is designed for people who stay invested the entire time.
They’re speaking to the buy and hold investor. What the experts are saying is don’t ride the roller coaster down…and then get off…before it returns back up to the platform.
So here’s the interesting part. Take a look at this chart provided by my friends at realinvestmentadvice.com.
The reason that portfolio risk management is so crucial is that it is not “missing the 10-best days” that is important; it is “missing the 10-worst days.” The chart below shows the comparison of $100,000 invested in the S&P 500 Index and the return when adjusted for missing the 10 best and worst days.
Clearly, avoiding major drawdowns in the market is key to long-term investment success. If I am not spending the bulk of my time making up previous losses in my portfolio, I spend more time growing my invested dollars towards my long term goals.
So me, I’m accumulating cash because the key to investing is having cash when the opportunities present themselves. Which they will. They always do.
That’s just the way it works!
Required disclosures: Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and (Strataxa Retirement Advisors, LLC) are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.
Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional