Wednesday, May 13th, 2020
If you’re worried about the stock market and you’ve been thinking about timing an exit from your investments soon, then you’re going to want to watch the rest of this video.
Today we’re going to be talking about market timing and if now is a good time to be selling your investments.
Over the last several episodes we have been talking about COVID-19 and the affect it has been having on the global economy. You keep hearing more bad news about the health issues, more bad news about businesses and unemployment, and more bad news overall about the global economy.
We’re probably in a recession right now, remember a recession is two back-to-back quarters of contracting growth. So far in the first quarter of 2020 that was true, and we are in the second quarter right now, but it got so bad so quick, that most people at this point assume and acknowledge that we are probably in the midst of a recession. We can’t call it official until the end of the second quarter.
That being said, does it make sense to be thinking about selling your investments now, and why not just buy them back later? You could sell now and buy back later, especially if we think there’s going to be a second wave of the Coronavirus and that it can have a big effect on the economy again. Who knows?
It sounds like an easy and simple plan, but it’s not, because you have to be right twice. You have to be right about when to sell and you have to right about when you’re buying. This is called market timing, and just so you know, no person and no computer has ever successfully been able to market time over the long-term. That’s because you can’t predict the market. The stock market is random.
Let’s look at a few examples. Recently we had several really bad, record-breaking days in the stock market as part of the COVID-19 pandemic. Here on the screen we have October 19th, 1987. This is the original Black Monday. This was the worst single-day percentage drop ever, and it still is, the S&P 500 drop 22% in a single day! That’s a lot, 22% in one day.
So how would anyone have known, if that happened on a Monday, the week before on Friday, they were supposed to sell all their Investments. That’s when you were supposed to sell, and when were you supposed to buy back? Look what happened over the next two years. You should have bought back in basically right away, or within a month or so, because the stock market went up 54% over the next two years after Black Monday in 1987.
But the stock market doesn’t normally move that fast. That was a situation when the market went down abruptly and then recovered pretty quickly, and went on to recover at a steady rate.
What about something more recent like the Financial Crisis and the Great Recession. Here’s that chart. Now this lasted over a year and a half, from October 2007 to March 2009. Take a look at the chart, think about it, when would you have actually sold? Would you have sold in May or maybe in June, when the recession was actually official. Would you have waited a little bit longer till things really heated up, and there were bank failures and other issues going into September and October of 2008.
I don’t know, right that’s market timing. I have no clue when you would have been able to make that call, especially during the Financial Crisis. Not to mention, when would you have bought back in?
Now with the Coronavirus, certainly you have people out there that sold some of their investments before COVID-19 really wreaked havoc on the markets. Remember going into this the global economy had really positive momentum.
From the peak in late February until March 23rd, 2020 the S&P 500 lost more than 30%. That is a really quick drop, over a period of about a month. Do you remember how you were feeling in late March? Were you thinking about hitting the exit button on your investments then?
Well hopefully you didn’t do that, and you stuck with your long-term investment plan, because a full month later, from March 23rd to April 23rd, 2020 the S&P 500 was back up over 25%. That’s still lower than the peak in February, but it’s quite a recovery so far.
Do you think the people that sold their investments predicted that March 23rd would be the day to buy back in? Probably not. Then again, maybe some of them are still concerned the market is going to drop even further. Maybe they think it’s going to happen soon, and maybe they’re going to be right or maybe they’re going to be wrong. I have no clue, but what we do know is if you did sell your investments you just missed some of the best days ever in the stock market. That’s not good for your portfolio long-term.
We did some research because we wanted to figure out what would happen if you missed some of the best days in the stock market. What if you were market timing, and you got out of the market, and you missed some of those best days.
I was really surprised when I saw these numbers here they are. We looked at the 15 year period ending December 31st, 2019 and here it is. If you just stayed invested in the S&P 500 over that entire period and did nothing, so you went through the great recession, right, and did nothing, you stuck to your investment plan, you would have averaged a 9% annualized return.
On a $100,000 investment you would have $364,000 but if you missed just the 10 best days, that’s only 10 days out of a 15-year period, you would have done less than half as good, 4.1% would have been your average annualized return.
If you missed the 20 best days, you’re barely eking out a gain of 1.7% annualized. If you missed the 30 best days over that 15-year period, you’re now in the negative. You would have lost money.
I want to know what you think of that. Did you expect the numbers to be that big of a difference? Leave me a comment, tell me what you think about that.
Now you see, or you’re starting to see, why it’s so hard to time the market. You have to get lucky, not once, but twice. That sounds like a lot of luck, and you just can’t predict the market. Nobody really knows what’s going to happen tomorrow, what’s going to happen next week, what’s going to happen next year.
Think about this right now. We have all this bad news, a contracting economy, record unemployment, but the stock market is still going higher. Why?
We’re going to be talking about that and more in an upcoming episode here of the smart money show.
Bottom line, don’t try to time the market. With market timing you have to get lucky, you have to be lucky when you sell, you have to be lucky when you buy, that’s just way too much luck. Ultimately, it’s time and not timing that’s going to determine your success with investing long-term. Those are just the facts.