“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves” – Peter Lynch
If you pay attention to the financial media, you know that the 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 predict a 2008-like correction that could send the market down 40 to 50 percent – Do you get out of the market, thinking you can time the move, or do you stay invested?
It 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 who stay invested (evidence is provided below), yet, incredibly, as evidenced by the massive amount of inflows and outflows reported for mutual funds, investors continue to think they can time the market, often with disastrous results. Just consider the following factoids1:
- For every bear market, a bull market follows, which, on average, is nearly four times longer in duration.
- The average duration of bear markets is 14 months while the average duration of bull markets is 48 months.
- The average decline of a bear market is 27 percent, while the average gain of a bull market is 147 percent.
The key takeaway here is that bear markets are only temporary, and the declines experienced are not only erased in the next bull market, the gains of the previous bull market were extended significantly.
Here are a couple of more factoids that should discourage anyone from trying to time the market:
- According to a study by Dalbar, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52% due primarily to poor market timing decisions. 2
- The same study found that investors moving in and out of the market failed to capture as much as 60% of the returns generated from the stock market.
- According to Morningstar, investors, who stayed in the market for all 5,218 trading days between 1997 and 2016, earned a compound annual return of 7.7%. However, if they missed just the 10 best days of stock market returns, they would have earned just 4.0%. If they missed the 50 best days during that period, they would have lost 4.2%. 3
Let’s face it. Most people are lousy timers. You know you would be a lousy market timer if, every time you switched to the shorter line in the grocery checkout aisle, it turns out to be the slower line. The actual cost in terms of time, frustration and dignity almost invariably exceeds any possible gain you might have achieved in making the switch. Instead, follow our advice - stay invested and win.
Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
1Mackenzie Investments. Bull and Bear Markets – S&P 500. Feb 2018
2Dalbar. Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior 2015. 2016
3Morningstar. The Cost of Market Timing. 2017