Over the past few months, there have been many days when the financial markets have risen or fallen by 1% or 2%. This level of market volatility often attracts people trying to time the market – to guess when a new high or low is hit, then to sell or buy stocks accordingly at those times.
Market timing creates a dilemma. While it is true that markets move in cycles and a number of signals can help indicate these market turns, some investors, magazine editors and cable TV experts claim to be able to predict and exploit these inflection points and “beat the market”. ”
The problem is consistency: it’s very difficult for anyone to determine – with precision and consistency – where the stock market and individual stocks are headed. The most successful market timers spend all their time and attention watching and acting on these market signals. They don’t have “day jobs” like the rest of us.
Even if you think you can call the top of the market, and therefore know when is the best time to sell, the problem is knowing when is the best time to get back into the market and start buying. Making both decisions correctly is a challenge, even for professional investors. Indeed, the stock market is made up of millions of investors, each following their own strategy, according to their own timetable. As a result, market movements may be delayed or exhibit unexpected “noise” at a time that is otherwise conducive to buying or selling.
Even more worrying are investors looking for performance – buying high and selling low. Buying yesterday’s winners (“hot stocks”) and selling yesterday’s losers inevitably hurts tomorrow’s performance. This strategy is counterproductive to sticking to a regular pattern of buying and rebalancing against a target allocation.
Hardly anyone has perfect timing. A better and more reliable approach is known as cost averaging, where you invest the same amount at regular intervals. While this approach does not guarantee a profit or protect against losses, it does have the benefit of helping you avoid procrastination, minimize regrets, and avoid the psychological urge to time the market. But cost averaging involves continuous investment in securities regardless of the fluctuating price levels of those securities, so you need to consider your ability to continue buying despite fluctuating price levels. Such a plan does not guarantee a profit or protect against losses in declining markets.
TIME OUT OF MARKET CAN BE COSTLY
When markets turn volatile, as they have typically been since the start of the pandemic, investors may be tempted to exit. But the presence of volatility doesn’t mean you should sit down. Our firm’s own research shows that the best and worst days to be in the market actually occur in similar environments, all when volatility is above average.
In fact, it can be very expensive to liquidate your holdings when you’re under stress. When investments lose ground, they have to regain ground, in percentage terms, just to get back into balance. The math is simple: If you experience a 30% loss, you’ll need to make a 42.9% gain to get back to where you were before the slowdown. Historically, the stock market has always rallied and advanced, and we need to keep the faith even when the economy appears to be heading for tough times ahead. That said, past performance cannot guarantee future results.
ASSET ALLOCATION: A SMARTER APPROACH
In general, although every investor is different, you should think about holding a manageable balance of US and non-US stocks and bonds (or stock and bond funds), in appropriate combinations designed to anticipate and respond to changes in the economy. , market conditions and characteristics of individual securities (or “factors”). Such an approach should not be designed to beat a passive index; it’s to help you achieve a specific goal, such as maintaining your purchasing power in retirement or financing a college education. Avoid big moves in your portfolio, which can distort your returns, and instead look for opportunities to adjust your asset allocation strategy or rebalance your portfolio when markets are out of balance. Often your best returns can come during these times. That said, neither asset allocation nor rebalancing ensures a gain or protects against a loss. Any investment involves risk, including loss of principal.
Academic research and the lived experience of millions of investors have shown that time in market trumps market timing, especially over long periods of time. Making regular investment contributions at regular intervals will outperform a large investment at the “perfect” time. That being said, you shouldn’t be an entirely passive investor. Markets change, asset classes fall out of favor and you need to guard against “portfolio drift”. Consider working with a financial advisor who can help you build a well-balanced portfolio to support a comprehensive financial plan and help manage your emotions when markets get tough.
The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual.
Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at email@example.com. Securities offered by LPL Financial, member FINRA/SIPC. Advisory services offered by Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.