“Is this a good time to get in to the Market?”
“Are stocks too expensive? Should I sell and get out?”
I get questions like these. A lot. I’m flattered, of course. It means that they value my opinion.
But truth is, I don’t really know the answer. I don’t know when to buy or when to sell. If I knew, we’d be having this conversation on my yacht somewhere.
When you invest, you experience downturns. That’s a euphemism for losing money. Your investment portfolio doesn’t always go up. It goes down – by a lot sometimes.
It happens. It just does.
The possibility of losing money is a fact you accept when you invest. Of course, you knew that going in intellectually. But knowing and doing are two different things. When your account actually goes down by, say, 20%, it’s easy to panic. I mean, you’re talking $20,000 if your balance is $100,000. For a $1,000,000 portfolio, it’s $200,000. Ouch! For an even larger portfolio,… Well, you get the gist. These aren’t chump changes.
At that point, if you feel tempted to sell everything and move to cash to stop the bleeding, I can’t blame you for feeling that way. It hardly matters if you knew going in that you could lose money intellectually – “the market is volatile…” blah, blah, blah. Who cares? Who wants to lose money? You sure don’t.
True, I will not blame you for feeling that way. But I will stop you from doing so.
Let’s say you invested $10,000 in S&P 500 from 12/31/2005 to 12/31/2020. According to a study by Putnam Investments, your money would grow to $41,100. That’s a 9.88% annual return.
But if you missed only 10 best days of return during the same period, your balance would be $18,829. That’s less than half of being fully invested at all times. If you want to know, the return is 4.31%.
It’s worse if you miss more best days:
Stay fully invested. Resist the temptation to sell out of stocks or time the market.
Even if you get lucky and get the timing right on selling, you have to get it right to get back into the market. Once you sell and stay on the sidelines, it’s just too easy to miss a recovery (those precious few “best days”). It will be really, really hard to catch up.
To put things in perspective, according to a study by Ibbitson, after S&P 500 hit the bottom during the Great Depression (yes, that Great Depression in the 1930s), it came back with a roar and returned 367% in the next 5 years.
Same thing happened after the Great Recession of 2008-2009. For the 5 years starting in March 2009, S&P 500 returned whopping 178%.
I’m not old enough to remember the Great Depression. But I do remember that people were so traumatized in 2008 – 2009 that they rushed to sell out of stocks. Then they couldn’t get back into the market for several years. Unfortunately, they lost out on the sharp spike in the market that started in March 2009.
Of course, the above examples don’t take into account effects of income tax. Also, you can’t actually invest in the S&P 500 index. You have to invest through an S&P 500 index fund.
But regardless, the message is still the same.
Don’t time the market.
Stay invested at all times.
We do not provide legal or tax advice. Readers should consult their own legal or tax advisor. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Investors should talk to their financial advisor prior to making any investment decision. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.