Can You Time the Markets?
Investors often face a myriad of pessimistic headlines, and today is no different. The recent upsurge in inflation, a Fed that is raising interest rates, the war in Ukraine... It's been a difficult start to the year, and you may be wondering, does it make sense to sell stocks, and stay on the sidelines until things "calm down"? In other words, does it makes sense to time the markets?
The answer is no. Trying to time when to get in and out based on predictions rarely works well. The problem is that most investors that try to do so inevitable sell after significant drops, and miss the rallies that often follow.
The chart below shows how reacting to negative news can hurt long-term performance. It covers stock market performance over a 30 year period, from 1991 to 2020. Over this period returns were strong, annualizing at 10.70%. But what would have happened had you sold in the midst of the 2008-2009 financial crisis, and missed the best 6 month period? Your return would have been 1.5% lower! That's a big difference.
Missing consecutive days of strong returns can drastically impact long-term performance. The best strategy — stay disciplined during periods of volatility, even when the headlines might tempt you to do otherwise!
Performance of the S&P 500 Index, 1991 - 2020
David is the Co-Founder and Chief Investment Officer of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
In US dollars. For illustrative purposes. Best performance dates represent end of period. The missed best consecutive days examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best consecutive days, held cash for the missed best consecutive days, and reinvested the entire portfolio in the S&P 500 at the end of the missed best consecutive days. Annualized returns for the missed best consecutive days examples were calculated by substituting actual returns for the missed best consecutive days with zero.
S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.