There have been many days in the last few months when the financial markets have moved 1% or 2% up or down. This level of market volatility often attracts people who try to time the market — to guess when a new high or low will be made, and then sell or buy stocks accordingly at those times.
Bruce Helmer and Peg Webb
Market timing creates a dilemma. While it’s true that markets move in cycles, and there are a number of signals that can indicate market reversals, some investors, magazine writers, and cable TV pundits claim to be able to predict and take advantage of these reversals and “beat the market.” ”
The problem is consistency: It’s very difficult for anyone to accurately and consistently determine where the stock market and individual stocks are going. The most successful market timers spend all their time and attention observing these market signals and acting accordingly. They don’t have “day jobs” like the rest of us.
Even if you think you are able to get to the top of the market and thus know when is the best time to sell, the problem is knowing the best time to get back in the market and with that to start buying. Getting both decisions right is a challenge even for professional investors. Because the stock market is made up of millions of investors, each with their own strategy and schedule. As a result, market movements can be delayed or create unexpected “noise” at an otherwise good time to buy or sell.
Of even greater concern are investors who chase performance—buy high and sell 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 buying pattern and refocusing on a target allocation.
Almost nobody has perfect timing. A better, more reliable approach is called dollar 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 regret, and avoid the psychological urge to time the market. But the average dollar cost implies a continuous investment in securities, regardless of fluctuations in the price level of these securities. Therefore, you should consider your ability to continue buying even as price levels fluctuate. Such a plan does not guarantee a profit and does not protect against losses in falling markets.
TIME-OUTS FROM THE MARKET CAN BE PRECIOUS
If markets become volatile, as has generally been the case since the pandemic began, investors may be tempted to exit. But the presence of volatility doesn’t mean you should sit out. Our company’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 costly to liquidate your holdings when you are under stress. When investments lose ground, they have to gain more ground in percentage terms just to be recouped. The math is simple: if you make a 30% loss, you need to make a 42.9% gain to get back to where you were before the downturn. Historically, the stock market has always bounced back and moved forward, and we must keep faith even when the economy seems headed for a difficult time. However, past performance cannot guarantee future results.
ASSET ALLOCATION: A MEANINGFUL APPROACH
While every investor is different, in general you need to 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 changes in the economy to anticipate and react to market conditions and individual security characteristics (or “Factors”). Such an approach should not be designed to beat a passive index; It’s designed to help you achieve a specific goal—such as maintaining purchasing power in retirement or funding a college education. Avoid large moves in your portfolio that can hurt your returns, and instead look for ways to adjust your asset allocation strategy or rebalance your portfolio when markets become unbalanced. It is often during these periods that you can achieve your best returns. However, neither asset allocation nor rebalancing guarantee profit or protection against losses. All investments involve risk, including loss of capital.
Academic research and the lived experience of millions of investors have shown that time on the market beats market timing, especially over long periods of time. Making regular investment contributions at regular intervals trumps a large investment at the “perfect” time. That being said, you shouldn’t be a completely 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 balanced portfolio to support a comprehensive financial plan and help you manage your emotions when markets get stormy.
The opinions expressed in this material 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 to the Wealth Enhancement Group and co-hosts “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at [email protected]. Securities offered by LPL Financial, member FINRA/SIPC. Advisory services provided by Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities of LPL Financial.