In the last 2 decades, there have been 3 notable market corrections that have sent the global economy spiraling into economic recessions. In 2000 we saw the S&P 500 drop nearly 50% due to the technology bubble. In 2008 the financial crisis caused an even larger drop of 57%. And now, a little over a decade later, the 2020 Covid-19 pandemic resulted in yet another 30+% decline.
Most investors are willing to accept the inherent volatility that comes with owning equities in exchange for the higher potential return they will receive. However, wouldn’t it be nice to experience all the market upside and avoid the downside? The strategy of selling equities now and waiting to get back in at the bottom of a market decline can be tempting. And while it seems reasonable, there is a problem with this approach: Timing market bottoms is next to impossible.
Take a look at this chart illustrating market trading days over the past 27 years. Each line represents the daily percentage gain or loss of the S&P 500. Equities have historically had a 55% likelihood of going up and a 45% likelihood of going down on any given day. They also have historically had a 70% chance of being up in any given year.
Note that big down days are often followed by large up days — and therein lies the problem of attempting to time the market. When investors exit the market they take on an enormous amount of risk by potentially being out of the market on the large up days. The chart below refers to the deviation in returns that resulted from being out of the market for various periods of time from 1990 – 2019. Remaining invested throughout the entire period yielded the highest annualized compound return.
During a bear market, some investors believe that selling out or exiting the market will relieve them of the stress that results from riding the up-and-down rollercoaster of owning equities. But this stress is often immediately replaced by the new worry of trying to decide when to get back in.
Trying to time markets is not an investment strategy – taking an evidence-based approach and systematically rebalancing your allocation periodically is. Sticking to your long-term investment plan will have a far greater impact on long-term results than trying to win this losers game.