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The Cost of Timing the Market

Markets have come down a bit from all-time highs, but the S&P 500 index is still up over 17% this year. Since March 23rd of 2020, the S&P 500 is up over 55%! For all investors, intense rallies like this beg the questions:

  • Is now a good time to put cash to work, or should I wait until the next correction?
  • Should I be trimming my winners by selling stocks and buying bonds?
  • I’m not sure the market or economy can keep this up and there are a lot of risks out there for the next year and even next decade, should I change my strategic allocation to hold fewer equities?
  • Or maybe: I know people who talk about their big gains and I don’t want to miss out – should I be changing my portfolio so that I can participate more in this exciting rally?

These are good questions to be asking. We want to talk with you about your feelings towards the market’s rally and future expectations. More importantly, we want to talk with you about how that fits into your risk tolerance, protecting your current needs, and meeting your future goals.

Many times, at the essence of these questions lies the concept of market timing – predicting when to enter and exit stocks, bonds, and cash as various investments experience rallies and corrections. The fact is, timing the market is extremely difficult.

Even missing just a few of the best days in a market rally has an enormous impact on an investor’s returns. Here are some stunning statistics put together by Dimensional Fund Advisors:

As we can see, missing the best 15 days of S&P 500 returns in the last 30 years would result in about one-third as much ending wealth!

Short periods of time “out of the market” could have huge opportunity costs, and it’s extremely difficult to accurately and consistently time entries and exits from the market. For example, someone might have seen the early declines of February 2020 and sold their stocks – correctly predicting that further losses were yet to come. But without a quick reentry, they would have been far better off to simply “ride out” the market correction and fully participate in the speedy recovery. Similarly, an investor today might leave cash on the sidelines, predicting an upcoming correction. If the market continues to rise, it often becomes harder to abandon the cash position, fearful of “buying high.” Many investors experience this ‘paralysis’ and miss out on the growth that disciplined, long-term investors receive.

On Monday, there was a great article on Morningstar that highlighted the long-term returns of market timing by professionals. Mutual funds with this focus are known as tactical asset allocation funds, and they’ve lagged their benchmarks significantly. Quite simply, it’s just hard to predict the future!

At Boardwalk, we believe in the importance of discussing our clients’ needs, goals, risk tolerance, and emotions when making investment choices and we use robust empirical findings to help clients be comfortable with their portfolio and confident in their decisions.

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