Timing the Market: Why it is a Bad Strategy

By Mike O’Donnell, CFP® and Ryan O’Donnell, CFP®

Key Takeaways

• Time in the market always beats timing the market.

• Missing out on just a few of the biggest days in the market can have devastating consequences for your portfolio.

• Stocks are a forward-looking indicator not a trailing one. They typically start to rebound months before the end of a recession.

Chances are, we’re already in a recession. But even if we’re not, don’t do anything rash with your financial plan. Markets often hold up quite well during recessionary periods and you don’t want to miss out on the eventual recovery. More on that in a minute.

With preliminary GDP figures showing a second consecutive quarterly decline in GDP in Q2 – albeit modest -- we’d technically be in a recession using conventional metrics. We won’t know for sure until many months down the road. But as the old saying goes, “economists have predicted nine of the past five recessions.” But that doesn’t necessarily mean the economy will stall out. And it’s not necessarily a bad thing for businesses or investors if the dreaded “R” word helps keep runaway inflation in check.

Not sure if you noticed, but stocks (S&P 500) quietly gained 8% during the month of July and stocks are about 12% higher than they were after the recent low point set in mid-June. We’re sure there's more volatility ahead and no one knows for sure whether the current rebound will last. But the stock market tends to be a forward-looking indicator of the economy, and that’s why we’re seeing some hints of optimism after all the doom and gloom this year.

Markets typically bottom out and start to rebound months before the end of a recession as the chart below shows. Just don’t sit on the sidelines waiting for the market to issue you an all-clear signal that it’s safe to get back in.

      AVERAGE:    -1%                       +16.9%

As mentioned in a previous article, a bad first half to a year doesn’t mean the full year will be in the red. The S&P 500 was down about 21% for the first half of 2022 – officially bear market territory. In fact, it was the worst first half to any year since 1970. But if there’s any silver lining, when stocks are down at least 15% at the midway point to the year, they often roar back strongly the second half. Not always, but often (see chart below).

What’s more, the S&P 500 has actually posted positive returns in seven of the thirteen recession years since World War II, and the average decline in those recession years is only 1%. In fact, the market has been positive all but three times in the year following recessions, with an average gain of nearly 17%.

Whether or not you believe the data we’ve shared with you, don’t try to time the rebound. It may have already started back in mid-June in which case you missed out on 12% of gains if you’ve been sitting on the sidelines in cash. Or the rebound may fizzle short-term, and we’ll have continued ups and downs for a while. Nobody knows for sure. The point is you’ll never get an “all safe” memo from the Fed, the NYSE or your brokerage house that the bear market is over it’s safe to get back into the stock and bond markets. It’s better to stay invested, stick with your plan, and have your trusted advisor help you rebalance your portfolio as needed, especially if your life circumstances have changed recently.

FOMO (fear of missing out)

One of the biggest mistakes we see investors make – whether close to retirement or just entering the workforce – is missing out on the best single days in the stock market. And those big days often came during the earliest days of a recovery.

Going back over the past 15 years (ended December 31, 2021), if you stayed fully invested in the S&P 500 over that time, your initial $10,000 investment would have grown to $45,682 – a 10.66 annualized rate of return. But if you missed just the 10 best days in the stock market over that 15-year period, you would have earned just $20,929 (5.05% annualized). That’s less than half of what someone who remained fully invested would have earned. If you missed out on the 20 best single days over that 15-year period, you would have only $12,671 in your account (1.59% annualized) about 70% less than someone who remained fully invested and so on. Talk about FOMO (Fear of Missing Out).

Source: Putnam Investments

Conclusion

Remember, stocks are not valued based on what's happening today; they are valued based on what the investment community thinks their future profits, costs, revenue, new products and ultimately future cash flows will be. It’s a long-term game. Trying to pick a stock or time the market is gambling and not investing. Be an investor.

As the old saying goes: “Time in the market always beats timing the market.”

We are happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.

Connect with us

Have a question?

Market Returns through a Century of Recessions

What does a century of economic cycles teach investors about investing? Markets around the world have often rewarded investors even when economic activity has slowed. This is an important lesson on the forward-looking nature of markets, highlighting how current market prices reflect market participants’ collective expectations for the future.

Countdown to College

As a parent, you of course want to give your child the best opportunity for success, and for many, attending the “right” university or college is that opportunity. Unfortunately, being accepted to the college of one’s choice may not be as easy as it once was. Additionally, the earlier you consider how you expect to pay for college costs, the better. Today, the average college graduate owes $37,172 in debt, while the average salary for a recent graduate is $50,944.

Preparing for college means setting goals, staying focused, and tackling a few key milestones along the way — starting in the first year of high school.

Freshman Year

Before the school year begins, you and your child should have at least a handful of colleges picked out. A lot can change during high school, so remaining flexible, but focused on your shared goals, is crucial. It may be helpful to meet with your child’s guidance counselor or homeroom teacher for any advice they may have. You may want to encourage your child to choose challenging classes as they navigate high school. Many universities look for students who push themselves when it comes to learning. However, a balance between difficult coursework and excellent grades is important. Keeping an eye on grades should be a priority for you and your child as well.

Sophomore Year

During their sophomore year, some students may have the opportunity to take a practice SAT. Even though they won’t be required to take the actual SAT for roughly a year, a practice exam is a good way to get a feel for what the test entails.

Sophomore year is also a good time to explore extracurricular activities. Colleges are looking for the well-rounded student, so encouraging your child to explore their passions now may help their application later. Summer may also be a good time for sophomores to get a part-time job, secure an internship, or travel abroad to help bolster their experiences.

Junior Year

Your child’s junior year is all about standardized testing. Every October, third-year high-school students are able to take the Preliminary SAT (PSAT), also known as the National Merit Scholarship Qualifying Test (NMSQT). Even if they won’t need to take the SAT for college, taking the PSAT/NMSQT is required for many scholarships, such as the National Merit Scholarship.

Top colleges look for applicants who are future leaders. Encourage your child to take a leadership role in an extracurricular activity. This doesn’t mean they have to be a drum major or captain of the football team. Leading may involve helping an organization with fundraising, marketing, or community outreach.

In the spring of their junior year, your child will want to take the SAT or ACT. An early test date may allow time for repeating tests their senior year, if necessary. No matter how many times your child takes the test, most colleges will only look at the best score.

Senior Year

For many students, senior year is the most exciting time of high school. Seniors will finally begin to reap the benefits of their efforts during the last three years. Once you and your child have firmly decided on which schools apply, make sure you keep on top of deadlines. Applying early can increase your student’s chance of acceptance.

Now is also the time to apply for scholarships. Consulting your child’s guidance counselor can help you continue to identify scholarships within reach. Billions in free federal grant money goes unclaimed each year, simply because students fail to fill out the free application. Make sure your child has submitted their FAFSA (Free Application for Federal Student Aid) to avoid missing out on any financial assistance available.

Finally, talk to your child about living away from home. Help make sure they know how to manage money wisely and pay bills on time. You may also want to talk to them about social pressures some college freshmen face for the first time when they move away from home.

For many people, college sets the stage for life. Making sure your children have options when it comes to choosing a university can help shape their future. Work with them today to make goals and develop habits that will help ensure their success.

Connect with us

Have a question?

Retirement Traps to Avoid

Connect with us:

Have a question?

Don’t Get Lured into the Casino

By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®

Key Takeaways

• Your portfolio is like a bar of soap -- the more you touch it the less you have. 

• Emotion and intuition were valuable survival skills for our ancestors, but they make us bad long-term investors. 

• Meeting with your advisor is not just about the numbers.

Our firm’s philosophy has always been geared toward long term consistent returns. But, it’s hard not to get lured into something shiny and new. 

Yes, it's frustrating right now when just about every asset class is going down from stocks and bonds, to real estate, gold, even crypto. But while many people want you to believe “it's different this time,” it rarely is different. The same principles that have delivered exceptional results over the last 100 years still hold true today. 

If only we had 20/20 hindsight

Sure, if all of your money was invested in the energy sector at the start of this year, you would be among the few who made money this year. Or if you had pushed all of your chips into tech from 1997 until late 1999 you would have been sitting pretty – provided you knew exactly when to get out before the dot-com crash of 2000.  Financial stocks would have been a great choice from 2004-2007, but would you have been able to get out of your position before the global financial crisis of 2008-09? 

The trouble is that timing markets (and picking the right sectors) is really hard to do. It’s even harder than beating the casino night after night. Countless independent studies have proven that. The problem with timing is that you have to be right about when it’s time to get out, and even harder – you have to be right about when it’s time to get back in.  That’s why it’s so important to have a globally diversified portfolio and a long-term view.

Remember back in 2010, a 30-year U.S. Treasury bond was yielding 4%. Sounds pretty good, right? Well, all the experts were telling us to stay out of Treasury bonds back in 2010 because they were sure rates would be rising for the next several years. Turns out the 30-year government bond rate dropped to as low as 1.27% over the next 10 years. And most investors had to endure years of meager returns on the “safe” part of their portfolios.

Experts are smart, but they’re not always right. As the old saying goes, “economists have predicted 21 of the last 3 recessions.” What seems so obvious turns out to be wrong. As legendary baseball manager Casey Stengel liked to say: “Never make predictions, especially about the future.”

Why is this?  The markets do a good job of pricing in expectations. So, when something is obviously going to happen – say the Fed preparing to raise interest rates – that information is accounted for in prices and rarely causes price disruption. The things that cause markets to move erratically are the unexpected events and how people react to them – usually not calmly.

The reality is that your portfolio is like a bar of soap -- the more you touch it the less you have.  Over the last 30 years, if you just held your portfolio without making any changes to it your equity portion would have returned on average 10.7% per year. Not bad.

The problem is we’re human. We have emotion. We think we have intuition. It’s not in our nature to leave things alone. Emotion and intuition were valuable survival skills for our ancestors, but those triggers make us bad long-term investors. That’s where a professional, objective advisor can be extremely helpful. Talking to him or her regularly will reassure you that you’re doing the right thing. 

When there’s lots of volatility in the market and things are uncertain, it’s natural to want to change things up. But an advisor can help you re-focus on what's important in your life, not just the finances. To us, the most important meeting with your advisor doesn't involve a performance report or any specific agenda. It's about connecting on a personal level. 

Are there any important changes in your life? Who are the people and causes you care about most? How do you want to be spending your time when you’re no longer working? Your financial plan is not a scorecard; it’s a blueprint for getting you from where you are now to where you want to be.

There’s a great chart in our e-book “Avoid the Noise” called the Emotional Curve of Investing.

Let’s say you get a hot stock tip. Like most people, you don’t buy it right away. You track it for a while to see how it does. As expected, it starts trending up (you feel confident). And let’s say it continues its upward trend. Now you’re feeling arrogant or greedy, so you buy it. Of course, soon after you buy it, the stock starts dropping. Now you feel fear and regret, possible shame. You promise yourself that if the stock just goes back up to where you bought it (Fallacy of Breakeven), you will never do it again. You don’t tell your spouse or partner about your investment.

Now let’s say the stock continues to go down (Panic). You don’t care about making profit anymore; you just want to get out with a respectable loss. So, you sell on the day it recovers a little.  And what happens next? New information comes out and the stock races to an all-time high (Regret and Anger).

As humans, we have emotions, which makes us poorly wired for investing. Emotions are powerful forces that cause you to do exactly the opposite of what you should do. And that’s where your advisor can be especially helpful – preventing you from being on an emotional rollercoaster even though it seems the rest of the world is on one.

You can’t put a price tag on being able to sleep well at night.

Repeating our favorite quote from Warren Buffet: “Be fearful when people are greedy and be greedy when people are fearful.” We are happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.