Timing the Stock Market: A Recent Example
In December 2018, the stock market looked as if it might finally start to decline after one of the strongest bull runs we have experienced over a lengthy period in history. In fact, the S&P 500 stock index was down 9.18% that month, even heading into January, a traditionally soft stock market month.
In fact, investors so surely anticipated the stock market decline to extend, they pulled their money out of the market at a record pace. Recent data showed that between December 5-12 we experienced the largest singular-week outflow ever recorded, with investors pulling out $46.2 billion from U.S. equity mutual funds and exchange-traded funds. However, what actually ended up happening to the market trends is yet another reminder to us all: timing the market like this rarely works.
The S&P 500 was up 18.50% since the first of the year through May 3, 2019 and, even with a little downturn in the past week, has more than made up the losses it sustained in December. The lesson here is do not time the market. Because those investors either panicked or thought they knew better, they moved their money out of the market at exactly the wrong time. They missed the run-up in the S&P 500—so they didn’t get to recapture their lost value and then some.
While this was just one example of the pitfalls of attempting to time the market, take a look at the chart below for another historical example. This chart shows a period between 2008 and early 2009 during the recession when people were nervous about the market. It highlights three investor choices that were available at that particular time:
- Staying invested
- Cashing out and reinvesting one year later
- Cashing out and never reinvesting
Obviously staying invested paid off handsomely for the investor who didn’t attempt to time the market.
Most people understand the value that financial advisors bring to the table with regard to experience, knowledge, access to research and tools for example, but one often overlooked aspect of a proper financial advisory relationship is their ability to make un-emotional decisions about investments in your portfolio. Good advisors do not try to time the market, rather allocate assets appropriately—a great reason to start a financial relationship with an advisor today.