Why Market Timing Can Be So Costly
Greetings!
Time heals all wounds. But not always.
I can remember a conversation from around 2013 where a gentleman had told me after the 2008 crash, where he saw his 401k cut in half, he had moved it his entire portfolio to cash and didn’t have any intentions of ever investing it again.
Before the market crash, the S&P 500 was hovering around 1400-1500. It bottomed out in the 700s in March 2009 and then gained back 50% within 6 months and never crossed below 1000 EVER again.
Now folks, how many people do you think got out of the market at the top and then back in the market at the bottom, when it retraced 50% in that short of a period of time?
Also, how many have noticed that from October 14th 2022 to today February 3rd 2023 the markets have gained back 16% in that 3 ½ month timeframe?
It’s funny when I bring up this fact, most people had no idea. Everything they read or hear is all doom and gloom. That’s what sells.
How many times do we need to be burned before we realize we’ll never be able to perfectly time the bottom?
Not only do we have to perfectly time getting out, but we also have to perfectly time getting in.
I am not worried about avoiding the next 20% decline (that’s why we have cash for current needs) what I’m worried about is missing the next 20%, the next 50%, and the next 100% advance.
Coming back to our story from the beginning, our gentleman who had been in cash since 2008. Let’s give him some credit and we’ll say he did time getting out before the major drop (he didn’t) but let’s say he got out when the market was at 1400 in April 2008.
Since then, even after accounting for it dropping 50%, the market has delivered a 288% accumulative return with dividends reinvested or annual compounding rate of 9.6%.
Time heals all wounds… if you stay invested.
How quickly?
From 1926 through 2022, the % of the time the S&P 500 is positive:
1 year = 75% 3 years = 84% 5 years = 88% 10 years = 94% 15 years = 99.7% 20 years = 100%
If you are holding cash, waiting for a correction the historical odds are 3 to 1 against you.
Now in how many other areas of life would you take those odds?
Historical article · Originally published February 2023. Market data and tax rules reflect the original publication date. Past performance is not a guarantee of future results. Editorial and compliance review pending.