Jonathan M. Gardey, MBA, CFA®, CFP®
President and Chief Executive Officer
If you pay attention to the financial media, you know that financial pundits are rarely correct in their prognostications. But let’s say they are, and, as the stock market continues to hit record highs, they correctly forecast a 2008/2009-like crash that could send the market down 40 to 50 percent. Do you abandon the market, thinking you can time the move, or do you ride it out?
This theoretical situation raises the oft-debated question of whether those who try to time the market can outperform those who simply stay invested. It really shouldn’t surprise anyone that the winners are almost always the ones with the least time on the sidelines. Yet, incredibly, as is evidenced by the massive amount of money flowing in and out of mutual funds, investors continue to think they can time the market, often with disastrous results.
Trying to Time the Market Hurts Investment Performance
Studies have shown that investors who attempt to time the market invariably underperform the market. The most incriminating data can be seen in the significant returns gap that occurs when investors miss the best days in the stock market. Investors who flee the market during periods of severe volatility are likely to miss many of the market’s best days, which can hurt their returns.
Fidelity conducted a study showing the impact on returns when investors missed the market’s best 5, 10, 30, and 50 days out of more than 10,000 trading days. According to the study, if you invested $10,000 in the S&P 500 index and attempted to move in and out of the market, your returns suffered. Missing just the five best days invested in the market resulted in underperformance of $265,000.
Source: Fidelity Investments
Why is Market Timing so Challenging?
Investors who attempt to beat the market by trying to sell high and buy low don’t need to make one right decision—they need to make two right decisions, which is near impossible to do with any degree of consistency. The more formidable challenge is that, according to a Morningstar study, investors must be able to make the right decision 74% of the time to do better than the average market timer who underperforms the market by 3%.
A Dalbar study confirms that is absolutely unachievable for most investors. Its analysis revealed the 20-year annualized return of the average equity fund investor was 5% less than the return of the S&P 500 primarily because of poor market timing decisions.
Worse Yet, The Market’s Best Days Occur Near Its Worst Days
What makes timing the market even more challenging is that the very best days in the market occur near the very worst days. That means if you flee the market when it craters, you are more likely to miss the very best days of the market.
Consider the actual events in 2020. The market experienced two days with 9%+ returns in the S&P 500—both recorded as among the best return days ever. One occurred on March 13, following one of the worst return days in two decades. Then, on March 24, one day after the stock market hit bottom, the market rallied another 9%, long after many investors headed for the hills.
From there, the market gained another 40% over the next few months. But, if you missed the five best days during that period of time, your portfolio would be down nearly 30%.
The Bottom Line
Let’s face it. Most people are lousy timers. Just think about how rotten it feels when you switch to the shorter line in the grocery checkout aisle and it turns out to be the slower line. The actual cost in terms of time, frustration, and dignity invariably exceeds any possible gain you might have achieved in making the switch.
The best defense against market downturns is trusting and sticking to your long-term investment plan. For every bear market, a more enduring and more robust bull market follows. The short-term fluctuations of the stock market will have little if any impact on your long-term investment performance if you simply remain invested.
At Gardey Financial Advisors, we help investors and their families navigate the market cycles through every economic season and help answer any and all questions along the way. If you find yourself in need of comprehensive wealth services, we invite you to take a tour of our website and learn more about our firm. We best serve clients looking for exceptional client service and that value a long-term partnership and have minimum of $500,000 in investable assets.
If this sounds like you, we encourage you to reach out to us and schedule a complimentary and confidential introductory call at 1-800-550-3880. Our professional staff has over 175 years of combined experience and would be happy to see if we can be of service to you, as well
To better understand the nature and scope of the advisory services and business practices of Gardey Financial Advisors Inc., please review our SEC Form ADV Part 2A and ADV Part 3 (Form CRS) available via the SEC's website, www.adviserinfo.sec.gov. (Click on the link, select “Investment Advisor Firm,” and type in the firm name. Results will provide you with both Part 1, 2 and 3 of the Gardey Financial Advisors Form ADV.) Statistics from third-party sources are deemed to be accurate but have not been confirmed by Gardey Financial Advisors.
This communication is for informational purposes only and does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or is a substitute for, personalized investment advice from Gardey Financial Advisors. The opinions expressed reflect our judgment now and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied, is made regarding future performance. Readers who are not market professionals or institutional clients of Gardey Financial Advisors should seek the advice of their financial advisor, tax, or legal advisor before making any investment decisions based on this communication. Gardey Financial Advisors does not render legal, accounting, or tax advice. Gardey Financial Advisors works closely with our client’s other professional advisors. The solutions discussed may not be suitable for you, even if your situation is like the example presented. Investors must make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation will result in the mentioned outcome. The commentary does not represent any specific clients, investments, or strategies.
By selecting the links identified in this publication, you may be redirected to third-party websites, over which Gardey Financial Advisors has no control. Gardey Financial Advisors makes no warranties as to the content or accessibility of the third-party website and assumes no liability for errors or reporting inaccuracies. Gardey Financial Advisors neither approves nor endorses the statements made by the third-party on their website. Third-party website content is subject to change without notice and may or may not be updated. It is the responsibility of the viewer/reader to ensure third-party sites accessed are virus-free and Gardey Financial Advisors accepts no responsibility for any loss or damage arising in any way from the hyperlink or third-party website.