Question for the audience: What’s the WORST thing an investor can do?
Under-diversify? Over-diversify? Invest too conservatively? Invest too risky? Buy funds with high expense ratios? Start too late? Not aligning your time horizon, risk tolerance, and goals? Not picking the right stocks?
The answer: Timing the market
Timing the market is the act of buying or selling an investment by predicting future price movement of the asset.
99% of the time, this does not end well for investors. Historically, in the short term, capital market price movements are near impossible to predict. In the short term, the market is volatile and unpredictable. However, in the long term, the stock market has proven it’s upward trajectory.
Take 2022 as an example. Inflation at all time highs, interest rate hikes, and geopolitical tensions all are playing a role in short term market volatility. Additionally, the VIX rose above 30 for the first two weeks of March. Investors use the VIX to measure volatility levels as it is commonly known as the “fear index”.
So what’s the big deal? You sell a stock before it appreciates, and you buy a stock before it tanks. Does it really influence your portfolio long term? Keep reading for the good stuff…
According to JPMorgan’s Guide to Retirement report, if you invested $10,000 into the S&P 500 on Jan. 3, 2000, and did not touch a single dollar until December 31, 2019, your average annual return would’ve been 6%.
Your $10,000 would’ve grown to $32,421.
Now – what if during that timeframe you got spooked by market volatility? The Financial crisis in ’08, global political tensions with 9/11, and the pandemic crash of 2020. What if you tried timing the market? Let’s look at a chart from the Motley Fool:
Time Invested Since Jan. 3, 2000
Fully invested into S&P 500
Missed 10 best days
Missed 20 best days
Missed 30 best days
Missed 40 best days
Missed 50 best days
Missed 60 best days
Data Source: The Motley Fool
Crazy…from 1999-2018, almost a 20-year time period, missing just SIXTY of the markets best days brought a $10k investment down to $2,144 (-7.41%). If we put that in context:
There are 7,300 days in a 20-year time period.
During that 7,300-day time period, if you try to “time the market” and sell when the market is down or try to get back in at the wrong time, that’s a best day you could’ve missed. Little room for error…
Especially today, it’s difficult to keep a long-term mindset. The euphoria around investing is as high as it’s ever been as the “get rich quick” are plastered everywhere on the internet. According to Business Insider, More than 10 million new brokerage accounts were opened in 2020. Because of how well the market performed after the sharp market decline, investing became the new “shiny object”. FOMO ran rapid. My advice: Keep your eyes on the prize!
Being a successful investor isn’t about making correct short-term buying or selling calls. Capital markets reward investors who stay the course, control their emotions, and keep a long term mindset through extreme volatility. As a pretty smart investor once said: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”
Volatility is the price you pay for building long term wealth. The red days are normal, and the green day’s will follow. What defines you as an investor is your emotional sentiment on the red days.
Time In The Market>Timing The Market