Market Timing: Danger Danger

By: Mark Weiskind

Most investors, and certainly all our clients, know that market timing (i.e. trying to move in and out of the stock market based on a prediction of the future) is a bad idea.  I recently read an article with some data that really illustrates the risk:

  • Over the last 92 years (1927-2018), the S&P 500 has returned 10.1%/year
  • If we remove the best 92 months over that period, the return of the S&P 500 would be almost exactly 0% (0.01% to be precise)
  • So, if an investor was invested on average 11 out of every 12 months, but happened to miss that one best month, they got no return…while the buy and hold investor got over 10% per year
  • The numbers were very similar in the international markets as well, with almost all the return coming in short bursts

We’ve recently had what will likely be one of those top 92 months. In the month of January 2019, the S&P 500 returned approximately 8%.  Yet according to Morningstar, there were $83B of net outflows from mutual funds and ETFs in December 2018, making it the worst month of net flows since the financial crisis in October 2008. So right before one of those “best” months…and right after the worst quarter since the financial crisis… money was flooding into cash.  Ugh!

With so much of an investor’s long-term return coming over such short periods of time, it’s critical that investors be disciplined and stick to a sound long-term investment strategy.  In a 2006 article, Charles Ellis, author of the legendary book “Winning the Loser’s Game” wrote “The best way to achieve long-term success is not in stock picking and not in market timing and not even in changing investment strategy.  Sure, these approaches all have their current heroes and war stories, but few hero investors last for long and not all the war stories are entirely true. The great pathway to long-term success comes via sound, sustained investment policy, setting the right mix and holding onto it.”

It’s impossible to quantify, but perhaps the most valuable role an advisor can play is to work with clients to develop an appropriate investment strategy and even more importantly, ensure that it is adhered to.  The siren song of market timing is continually out there. Drowning out that noise is easier said than done.  But, giving into it can be wreak havoc on even the best laid plans.

Fairway Scorecard 4-30-2019