Key Takeaways
Research indicates that it’s nearly impossible to predict the right time to enter or exit the market consistently.
Missing just a few of the best trading days of the year can significantly diminish your portfolio returns.
Time in the market is far more important than timing the market. Missing out on gains can be just as painful as suffering losses.
With the stock market coming off its best stretch since October of 2022, many investors – including some of our clients – are now wondering if they have too much cash on the sidelines or sitting in bonds. Just a month ago, these same individuals were concerned about having too much exposure to stock as the market was grinding through a technical correction. This illustrates how FOMO (Fear of Missing Out) can significantly influence investment decisions.
It’s true the market, as measured by the S&P 500, grew by 24% for the 2023 year. Just keep in mind that this is not a typical broad-based bull market. Much of that gain can be attributed to the performance of seven mega-cap tech stocks. Further, most of that 24% gain occurred on just 10 big trading days.
That’s right if you happened to be sitting out of the market on just those 10 random days of 2023, you would only be at break-even or slightly in the red for the year to date. People who fled to cash recently or who piled into bonds when things looked bleak on the inflation, interest rate, and geopolitical front, missed out on a roughly 10% rapid recovery to the upside. I’m not suggesting we’re out of the woods – nobody knows for sure. My point is that recoveries, including mini-recoveries, happen so quickly that you don't have time to react.
I can’t tell you how many clients and prospects tell me: “I want to wait until things calm down a little before I get back in.” That means you want to wait until the market recovers before you get back in. That’s fine, but you’re not investing; you’re just speculating and market timing.
It’s so important to remember that a long-term steady course is what gets you to the finish line. When it comes to investing, attempting to time the market is a losing strategy. Again, the market’s 24% gain in 2023 can be attributed to just 10 big days of trading. If you missed out on those days, you missed out on much of the return for the entire year.
By the way, short recovery bursts resulting from a few high-impact trading days are not unusual. As the chart below shows, over the past four decades, if you missed out on just the 10 best trading days of the year, your portfolio would be 2.4% lower per year on average, than if you stayed fully invested (8.0% vs. 10.4%). If you missed out on the 20 best trading days per year, your portfolio would be a full 4.0% lower per year on average, than if you stayed fully invested (6.4% vs. 10.4%).
If your buy or sell decisions are based on predicting where you think the market is going (or not going), good luck. Research shows the odds are heavily against your ability to outperform the overall market consensus.
As financial planners, we advocate for having a disciplined, long-term investment strategy to reach your goals. We know that the market increases in value over time despite any short-term fluctuations caused by real-world events or the news. Long-term, the market almost always goes up. The key to harnessing that growth potential for your investments is all about “time in the market” not “timing the market.” This is what enables your investments to grow through the power of compounding.
Real-World Example
Grace Groner, a longtime secretary of Abbott Labs, and Richard Fuscone, a former Wall Street executive, represent two contrasting investment approaches. Groner accumulated a fair amount of company stock during her four-decade career at her company. For 75 years, she patiently reinvested her dividends and she never cashed in her Abbot stock or any of her other investments, even during all the recessions and wars she lived through. Groner never married or had children. When she passed away, she had built a $7 million portfolio, which she donated to her alma mater, Lake Forest College in Illinois.
By contrast, Richard Fuscone, who had an Ivy League education, and an MBA was a renowned active trader who made enough money to retire at age 40. At the time of his retirement, he was the Vice-Chairman of Merril Lynch, Latin American division. Even in retirement, Fuscone continued his active trading strategy and he ultimately filed for personal bankruptcy just a few weeks after Groner’s passing.
Grace and Richard’s story is a tale about the virtues of patience and discipline vs. active trading. Sure, there were some years when Fuscone’s investments far surpassed the unmanaged S&P 500 index. But he had plenty of other years when he performed terribly. Those years are what dragged down Fuscone’s long-term performance, despite all his experiences, connections, and credentials. If you're trying to outsmart the market, all evidence suggests that it’s nearly impossible to do so consistently over time. You’re far better off setting up a disciplined investment plan with your advisor and sticking to it regardless of what the markets are doing.
Conclusion
Life’s too short to be worrying about how much you gained, lost (or missed out on) in the financial markets every day. Focusing excessively on daily market gains and losses can be stressful and counterproductive. If you have concerns about your portfolio allocation or risk exposure, timing the marketing, and FOMO - please reach out any time. I’m happy to assist.
DAN SATZ MS, CFP® is a Wealth Manager at Novi Wealth