Last week we revisited diversification as a way to get back to basics and help balance your portfolio so it is better prepared to weather market storms. This week we are going to talk about self-sabotage and timing the market.
Believe it or not, there is actually a company out there that tracks investor emotion and its impact on investment decisions by studying the timing of mutual fund flows. This company, DALBAR, then approximates the return achieved by the “average investor” over a 20-year period. Its conclusion? Most investors are bad at market timing, but try to do it anyway.
Despite strong index returns over time, the “average investor” has underperformed a basic, indexed 60/40 portfolio by 3.5% annualized. A $100,000 initial investment from the start of 2001 through the end of 2020, adds up to nearly $170,000 of missed gains! Yikes!!
Logic says don’t even think about doing that, but of course, there are lots of humans who don’t think that logic is a rule that applies to them. Not any of you of course, and certainly not me! But they are out there, and they do attempt to time the market because they don’t think logic will strike. And what happens then? Well, typically they miss opportunities.
I really like this chart, it shows what can happen when an investor tries to time the market and misses opportunities. Here, the hypothetical investor missed the 10 single best days in markets over the past 20 years. If missing the 10 best days sounds as horrible to you as it does to me, consider that in the past 20 years, seven of those best days happened within just about two weeks of the 10 worst days.
The moral of the story is that if you run for cover when the markets get turbulent and then wait for the right time to get back in, you’ll likely miss opportunities to increase your returns. And remember, if you get back in at the top you’ll probably be overpaying for something you already had so all you’ve done is lock in your losses. Like our friend Warren Buffet says, “I get fearful when others are greedy, and greedy when others are fearful.” Wise words indeed.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Source: (18 February 2022). The case for (always) staying invested. JP Morgan. Retrieved 19 May 2022.