Monday, July 27th, 2020
When uncertainty runs rampant, as it has for the past six months, it can be tempting for some investors to “sit on the sidelines” until things improve. While it may satisfy some form of temporary relief, an investor is then left with the far more difficult decision of when to get back in.
Choosing When to Get Back In
If stocks do end up falling after you sell, you will be left with the tall task of buying into higher market uncertainty. Instead, most investors will be tempted to wait for stocks to fall even further, as that will be the prevailing sentiment when things get worse.
On the other hand, if stocks rally after you sell, you may be tempted to wait for them to fall back to the point at which you sold, “anchoring” to your own line in the sand. The whole exercise is a behavioral finance nightmare that few execute well and is best left unchallenged.
Besides the potential tax ramifications, investors often pay a large penalty for that urge, which can end up being a major handicap towards their long-term returns. That is largely because the long-term returns for stocks are heavily clustered into a small number of days, and you must be invested to capture those returns.
Recent Rallies Follow the Same Trend
For this most recent market rally, that has certainly been the case. There have been two 9%+ daily gains in the S&P 500 this year, both within the top ten of all-time daily returns. The 9% rally on March 24th occurred the day after the market bottomed, when things were seemingly at their worst.
Overall, the S&P 500 has rallied nearly 40% from its March bottom and is within 5% of its all-time high, sitting nearly flat for the year; however, if you missed just the 5 best days during this rally, your portfolio would still be down nearly 30% for the year.
The influence of a few days towards market returns is not just a 2020 phenomenon. From January 2000 through December 2019, missing just the 10 best days cost you nearly two-thirds of your annualized return. Missing the 20 best days erases the entire 6% annualized return.
And just as things played out this March, historically some of the best days occur shortly after the worst days, when investors are most tempted to capitulate and sell. Six of the ten best days occurred within two weeks of the ten worst days for the S&P 500 over that same timespan.
Advisors preach diversification and risk-budgeting for many reasons, but this reason is near the top. Having a plan and sticking to it, helps investors to avoid the costly behavioral pitfalls of market timing.
From Jack Holmes, CFA - WealthPLAN Partners
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes, and are not guaranteed to occur in the future.
All indices are unmanaged and may not be invested into directly. Advisory services offered through Feltz WealthPLAN, DBA of WealthPLAN Partners. Securities offered through Securities America, Inc., Member FINRA/SIPC. Feltz WealthPLAN and Securities America are separate entities.