Don't miss out on potential gains to your portfolio. Staying fully invested during market swings helps you catch the big days of S&P market gains.
There are some things in life you might be able to miss without much of a problem: The opening night of a popular movie, for instance, or your nephew’s high school graduation (maybe). But if you miss other things, like the market’s best days, you could find yourself truly losing out on the most important gains for your portfolio. In other words, some market timing strategies may be exercises in futility.
As an investor, a key lesson that’s admittedly tough to learn is how to keep your powder dry when you’re tempted to exit. Being out of the market might feel good for a while when bears are stalking the Street. You can always see that exciting new movie the next day, but if you miss one of the market’s big days, it may be gone forever, and your stock market investment portfolio might be stuck in neutral.
“Missing just a handful of days can sometimes turn hard-earned gains into losses,” said Keith Denerstein, director of guidance product management at TD Ameritrade. “This is why some investors conclude that the prudent thing to do is stay invested.”
For example, if an investor had moved in and out of stocks over the years and managed to miss the best 30 days of the stretch between the end of 2002 and the end of 2017, they would have lost money despite the fact that the market rose about 10% a year over that time span, according to research by Putnam (see infographic below). That’s just 30 days out of thousands, but no one ever knows in advance which days the market is going to hit it big. If you’re not invested, those days might come and go with your money sitting on the sidelines.
Can you time the market? It’s possible, and there may be some merit to cutting a losing position, but a market timing strategy can be a tricky proposition. It might come down to a couple of things to consider avoiding:
Trying to pick and time sectors. Many investors try to get cute and jump in and out of various sectors that they think might rise or fall at different times, perhaps based on one or more market timing signals. However, this is a dangerous notion and probably a strategy that won’t work for too many. Even financial professionals can’t always forecast which sectors might do well which year.
“There’s no one who’s able to call things exactly right exactly on time,” Denerstein said. “If you look at a performance chart of various asset classes from year to year, it’s a complete grab bag of the relative performance from one asset class to another. One might be up, another is down, and you feel like you’re missing out. But if you jump at whatever is the hot stock or asset class, you may have already missed it.”
Following the market too closely. Yes, it’s good to know what your stock market investments are doing and which fundamental factors are having an impact. It’s also important to consider re-assessing and re-balancing once or twice a year depending on how things are going. However, it’s a concept some investors take too far, to their possible detriment. When you keep watching and reacting to every tick, you’re likely to get more emotionally involved than necessary, and that can lead to spur-of-the-moment decisions that take you out of the game and might make you miss a major move higher.
For instance, if you got nervous watching technology stocks take a beating back in February 2018 as concerns about privacy issues took prices down, you might have let emotions take hold and exited your positions. Later in the year, you might have regretted such a move, as the S&P 500 Information Technology sector rallied nearly 14% over the next four months, according to S&P Dow Jones Indices.
“Investing can be very emotional,” Denerstein said. “You’re following all the ups and downs, and big moves can make you feel tempted to get into and out of the market. Coverage of the market online and on TV can keep you stimulated. If there’s even a handful of days where you’ve made an irrational decision, you would have done yourself a disservice.”
If you’re like most people and can’t precisely time market sectors or avoid all emotional decisions as you watch the daily action, there’s still hope.
“This ties into having a plan and sticking with the plan,” Denerstein said. “It’s also about working with a professional who can help keep you diversified and disciplined.”
Even if you choose to continue investing on your own, consider having a plan and sticking to it. Missing a graduation or a new movie might be painful for a moment or two, but missing out on your key financial goals because of failed market timing strategies could hit a little harder.
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