Even long-term investors can sometimes use timing strategies to go in and out of the market, but spending long-term time in the market could beat timing the market.
If you’re a long-term investor, you’ve probably heard the best way to weather a market storm is to keep your head down and wait it out. Trying to time the market can put you at risk of buying or selling at the wrong juncture and missing a rally.
“Market timing may be a risky proposition,” said Viraj Desai, senior manager of portfolio construction at TD Ameritrade Investment Management, LLC.
For example, look at 2020. Think of the fear that gripped the market in March of that year as the COVID-19 pandemic caused shutdowns worldwide, leading U.S. stocks to the quickest bear market plunge (down 20% from the recent high) in history. It took just about a month to go from all-time highs in the S&P 500 Index (SPX) in February 2020 to three-year lows by late March 2020.
Almost as fast as it started, the bear market ended. It was over in a month, and the SPX rose more than 75% between March 2020 and March 2021.
Staying invested isn’t just something that worked for investors during the pandemic. Research found that missing just a handful of the market’s best days could have caused you to lose out on the majority of potential gains over a recent 15-year period.
For instance, if someone had invested $10,000 in the SPX at the end of 2005 and simply ridden out all the bull and bear markets since then (even the historic drops of 2008 and 2020), they would have finished 2020 with more than $41,000 thanks to an annualized return of 9.88%, according to research by Putnam Investments.
On the other hand, if they’d tried to time the market by moving in and out of stocks and managed to miss the best 10 days of that stretch, they’d have ended up with less than $19,000 on an annualized total return of 4.3%. If they’d somehow managed to miss the 30 best days between December 31, 2005, and December 31, 2020, they would’ve lost more than $2,000 out of their original $10,000 due to annualized negative returns. That’s just 30 days out of thousands spread over 15 years. These numbers certainly help explain why stock market timing can be risky.
Remember: Only one person can sell at the exact high or buy at the exact low. Even the best Wall Street traders can’t do that consistently.
That doesn’t necessarily mean you’re stuck in place as Wall Street gyrates, however. But it helps to have a plan and stick to it.
You can buy or sell when times get turbulent, but many investors who do choose to get in and out of the market prefer to establish solid rules about entry and exit times before jumping in (or out). Making rules for yourself can potentially help investors avoid holding onto losing positions for too long or buying a given stock at lofty levels it might not be able to hold.
“It starts with having a plan before you place the trade,” said JJ Kinahan, chief market strategist at TD Ameritrade. “This applies not only to price, but to time frame. Being true to your time frame can help a lot.”
Here are some rules investors (and traders) should keep in mind when they trade in volatile times (or pretty much any time):
Working with a professional to develop a plan that identifies and helps you pursue your goals is a key first step in the investing process for many, especially investors who don’t want to be as hands-on or worry so much about portfolio management.
For long-term investors, stock market timing strategies may not be relevant, even when things get volatile like they did during the pandemic. The recent choppiness may have you nervous, but perhaps that old idea of keeping your head down and not watching every headline or stock tick makes sense at this point, especially if you don’t need your money for a long time.
“A common long-term investor attitude may be to look at pullbacks or corrections as potential opportunities, especially if you have a long-term time horizon, by staying the course and being disciplined,” noted Robert Siuty, senior financial consultant at TD Ameritrade. “Making systematic, periodic additions to your diversified portfolio over time and taking advantage of things like dollar-cost averaging is a common approach helping with building wealth in the long run.”
Desai added: “No investor has a crystal ball that will tell them the exact right time to buy or sell. Planning for your goals, staying invested, and evaluating professional portfolio management will give you some basic ideas to consider for your financial future.”
Dan Rosenberg is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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