One of my all-time favorite investment expressions seems appropriate to talk through right about now. That expression is, “Time in the market is more important than timing the market.” The expression essentially pits two competing investment philosophies against each other – market timing versus buy-and-hold investing.
According to Investopedia, market timing includes actively buying and selling to try and get into the markets at the most advantageous times while avoiding the disastrous times. Compare this with their definition of buy-and-hold investing, which involves buying securities to hold for a long-term period (although they correctly note that the definition of long-term varies based on the investor). Research shows time and time again that long-term buy-and-hold investing outperforms market timing, and much of that has to do with, well, timing.
Market timing, as an investment strategy, is incredibly appealing because it makes cognitive sense. The lure of getting in at just the right time or avoiding downturns may tempt even the most disciplined, long-term investors. But attempting to time the market is extraordinarily difficult (some might argue it’s nearly impossible and more likely based on luck than skill). To successfully time the market, you have to get it right twice: first, when to get out and, second, when to get back in. And then you have to get this right repeatedly throughout the future as market conditions change. If you study the track records of the most astute and sophisticated professional investors you’ll find that even they rarely get it right. History has shown no reliable way to identify a market peak or bottom. The market’s best and worst periods are often concentrated in a short time frame and many occur without warning.
The impact of missing just a few of the market’s best days can be profound. Imagine you had invested $1,000 into the S&P in 1970 and contributed nothing more. If you had left that initial investment alone – through good times and bad (and there were plenty during the past 50 years) – your investment would have been worth $138,908 by the end of August 2019. But what if you missed just 5 of the best days during that period? Your investment would be worth $90,171 (35% less than the buy-and-hold outcome). And if you missed the 25 best days, your initial investment would only be worth $32,763 (76% less than the buy-and-hold outcome). To further complicate the picture, many of the best days in the stock market occur near the worst days, so avoiding one means avoiding the other. The most fearful market drops are often followed by the largest relief rallies as investor emotions swing from one extreme to the other. Sound familiar? We are living it right now. The investors who adhered to a buy-and-hold strategy fared much better than those who did not, but how do they do it? Having realistic expectations is the first step.
Downturns are not rare events – they are inevitable. According to research published by Vanguard, since 1980 there have been:
- 12 market corrections (defined as a decline of 10% or more)
- 8 bear markets (declines of 20% or more, lasting at least two months long)
- 5 recessions (declines in economic conditions for two or more successive quarters)
But in every case the markets have recovered and gone on to new highs. Remember how jarring the Great Recession of 2008 – 2009 was? Each day we were inundated with imminent bank failures and bailouts, people losing their jobs, and record numbers of foreclosures. What followed was history’s longest bull market. And while it already seems like a lifetime ago, the S&P 500 was up over 31% last year alone! The good ol’ days…
Negative market conditions can put our near-term financial goals in jeopardy and can, therefore, make us feel like we have to do something. However, doing something drastic – especially during times of heightened emotional stress related to job security or personal safety – can have negative long-term financial consequences.
Rather than trying to time the market, there are other small things we can do during this time to make sure we stay on track with our near- and long-term financial goals.
Review your cash plan
Most advisors urge clients to keep some level of liquidity to protect them from the unpredictability of life, with many suggesting having enough cash on hand to meet 3 – 6 months of living expenses. If you feel like you are short on cash reserves, now is the time to beef up your cash cushion. Having appropriate cash reserves should alleviate the need for you to sell investments during an inopportune time.
Rebalance to targets
When markets dramatically increase or decrease, chances are your investment allocation targets become skewed. During good times and bad, it is important to make sure to rebalance your portfolio periodically to get back in line with your investment objectives and financial plan. This is also the simplest way to ensure that you are always selling high while the market is up and buying low when the market is down.
Continue your retirement contributions
While it may seem counterintuitive to do so, continuing to buy during a market downturn can be overwhelmingly helpful toward meeting your long term financial goals. In essence, the market is on sale. Your contributions during a downturn buy significantly more than when markets are higher. View this as an opportunity. However, I do have to offer one important caveat to this recommendation. If you feel that your cash position is light or that your income could be at risk during a downturn, it may be best to pause your investment contributions until you have saved enough cash to be comfortable or until the risk of lost income subsides.
Write down your feelings
I know, I know…feelings? Bear with me on this one. I want you to write down what you are feeling about the current downturn as it relates to your finances. Are you feeling stressed because you feel that your investment allocation was too aggressive? Do you wish you had more cash/liquidity? Or are you feeling opportunistic and seeing this as a buying opportunity?* Take these notes with you the next time you meet with your financial planner so the appropriate adjustments can be made to your plan going forward. It has been over a decade since the last recession, so what felt okay the last time around may no longer work for your current financial picture.
Don’t obsess over your account statements
Looking at your account statements everyday won’t help you. Review your statement quarterly, at most, in good times and in bad. Investments go up and they go down. What matters is your financial plan and whether you’re doing what is required to meet your long-term financial goals.
Stick to your plan
General George S. Patton once said that “a good plan today is better than a perfect plan tomorrow.” Successful investors create a financial plan and then stick to it, in good times and in bad. A significant market selloff should be one of the many scenarios contemplated by your financial plan. Continue to review your plan and keep your eyes fixed on the long term.
Market conditions like those we’ve experienced the last several weeks can challenge even our most fundamental views on investing. During times like this it’s important that we remember we’ve been through difficult market conditions before, and we will experience challenging times again in the future. Adhering to time-honored principles of good financial planning coupled with a buy-and-hold investment strategy can help us weather any market condition – good or bad. If we can help you during this time, please do not hesitate to contact us.
* According to individual investor research conducted by the Spectrem