Financial Planning Fridays #12: Market Timing

Today, in our twelfth episode, we wanted to talk with you about how important it is to stick with the investment strategy that is part of your long-term plan through both up and down markets, as well as to share data that supports this thinking.

There is a popular saying in personal finance that is, “Time in the market matters more than market timing.” We wanted to take a close look at the data and see exactly what this means for our clients.

The market has consistently moved higher over time. In fact, it is positive 53% of the time each day, 63% of the time each month and has been positive 73% of years

For funds that client’s are going to use in five years or more we generally recommend our clients maintain their long-term investment strategy through the market ups and downs because we don’t want them to miss the market’s best days. For goals less than 5 years away, it generally makes sense to keep those funds in short-term bonds or money market and avoid the increased volatility in the market.

Let me show you the data from the past 42 years.

This chart from Fidelity shows a $10,000 investment in the S&P 500 from 1980 until June 2022. If you had kept the $10,000 invested the entire time and ignored it, your investment would have grown to just over $1 Million. If you missed just the 5 best days over that 42 years, moving out of the market due to temporary bad news, your investment would have been worth $350,000 less, costing you over 1/3 of your return!

You can see if you missed the ten best days, your investments would have missed half of the return or more than $500,000. And finally, if you missed just the 50 best days of the more than 10,000 trading days during this time period- you would have missed more than 90% of the return- more than 900k.

To provide additional context with a very recent example, in the last week of March 2020, the majority of Americans moved a large portion of their allocation to cash, surpassing even those levels seen during the Global Financial Crisis. Unfortunately, the majority of those people never re-entered the market until it felt much “safer” in February

Why this matters is that on March 23rd, we saw the market low of the Covid-19 Pandemic. On March 30th, one week later, the market was 17.4% higher, and on April 14, two weeks after that, the market was 27.2% higher than it was on March 23rd.

Now is an especially good time to look at the historical outcome of making investments during bad times. This chart shows how investing during a recession has worked out over a 70-year time period from 1949-2019. If you were brave enough to make an investment during a recession, it would have averaged 18.4% just 1 year later and between 12-13% per year over the following 3 – 10 years. The green bars are those investments made during a recession and the blue bars are investments made during the good periods instead. While both sets of returns are good, it is clear from this data that investing during recessions has led to much more upside.

We can’t be sure what will happen in the future, however, if we use history as a guide, we can draw two conclusions;
Time IN the market has been more important than market timing. We need to make sure that we remain invested so that we can participate in the best days, which have previously made up a huge percentage of the returns.
Investments made during recessions, those made when things often feel at their bleakest, have performed better after 1, 3, 5 and 10 years then investments made during growth periods.

A special thank you to our client, subscriber, and good friend Bob B. who suggested that we create a video on this topic.

Our goal is to create content that addresses the topics most important to our clients, so if you have a topic that you are interested in or would like to learn more about, please let us know.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.