I’ve passed the 50-yard line in life, and I feel that the next big market run will be key for my retirement. The current bull market where share prices are rising to encourage buying has raged on for what seems like forever. More than eight years to be exact, but it will end at some point.
It always does.
Sometime, down the road, there will be an extremely attractive time to buy the stocks of great companies, sectors, or indexes at prices that are much more appealing than today. The key is: When? Nobody knows. That’s why the financial industry is full of professionals exhorting you to stay invested all the time.
Let’s examine why this is the case.
Simply, financial service firms make more money when you’re fully invested. They spread language like the following, which is from a Wall Street Journal (WSJ) piece titled, The Market Timing Myth.
“For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go or what’s going on in the economy. ‘You can’t time the market,’ they warn. ‘Studies show that market timing doesn’t work’.
And they trot out a fact of how terrible your returns would be if you missed out on the biggest (best) stock market days. This is correct. Returns are negatively affected when you sit out the big days
However, we know due to research and human behavior that stock market investors are an emotional breed. Many of us buy when we should sell and sell when we should buy. Those psychological forces are often to blame. The result is that when markets rise in euphoric times as they have since the 2016 election, investors continue to plow money into investments they manage passively with no help from professionals. Then, when markets fall and they grow weary of tears soaking their brokerage statements, they sell at the wrong time.
You clearly don’t want to miss the big days. I agree. But that’s only half the story. What about the disastrous days? Would it help to sit out the bloodiest days
A finance professor from a school in Spain studied this dilemma. Per the WSJ article:
“Over an investing period of about 40 years, he calculated, missing the 10 best days would have cost you about half your capital gains. But successfully avoiding the 10 worst days would have had an even bigger positive impact on your portfolio. Someone who avoided the 10 biggest slumps would have ended up with two and a half times the capital gains of someone who simply stayed in all the time.
Greg Morris studied this as well. His chart is below:
Missing the bad days will help your returns.
Market timing doesn’t work, so give that strategy a pass. I always have about 30-50% of my portfolio in equities at all times because markets move faster than I do. To me, having 100% cash or equities is a mistake.
Use positive (upward) price action to raise cash. In other words, sell the rallies; the times when the market goes higher and you can take some profits. At the very least, use times of incredible strength to rebalance your portfolio. Although it may not seem intuitive, if you aim for a certain split (i.e. 60% stocks/40% bonds), use these opportunities to rebalance to your ideal allocation. Currently, I’m seeing a lot of retirement accounts that are out of balance because stocks have increased so much in the last three or four months. Rebalancing forces you to sell some of the winners, which will help you in the long run.
That’s just the way it works!