We know that trying to time the market is a bad idea, and taking a long-term view with a portfolio that’s diversified according to asset class, geography and market sector is the key to investing success.
Nevertheless, that doesn’t mean we’re immune to the messages that bombard us from the financial media screaming that this is an ideal time to buy, or a great time to sell.
There is an ideal time to buy and sell, of course.
The best time to buy is when shares are at their lowest point and just before they start to rise.
The right time to sell is when they’ve reached their peak, just before they start to decline again.
The trouble is, who knows exactly when those precise moments will be?
They are concentrated into just a few days each year – and a study by academics at the University of Michigan found that, from 1963 to 1993, an average of just three days per year (90 days in total) were responsible for 95% of the market gains over those three decades.
Being uninvested on those key days can have a major effect on the value of your portfolio. If you’d missed them by selling just one day before, for example, your returns would be a mere 5% of what they could have been if you’d just bought and held.
We’d defy anyone to predict three specific dates a year over a 30-year period with any degree of accuracy at all. The only way to be sure you don’t miss out on the golden investing days is to stay invested.
The average return of the stock market, adjusted for inflation, is still a healthy 10% or more per annum for the S&P 500, averaged over the 94-year lifetime of the index. For the FTSE 100 it’s an average of 8.8% per annum since its launch in 1984.
Long term, that’s a healthy return; if you reinvest dividends and, of course, accept the dictum that past performance is no guarantee of future success.
But what about crashes?
Of course, some stock market movements represent more than the usual fluctuations, and are a response to major global events.
Human instinct is to run away from disasters, not sit them out; but, even in the face of some of the most dramatic market falls of recent years, sitting tight is still the right thing to do.
US financial strategist Marcy Keckler, quoted in usnews.com, suggested that it takes up to 70 weeks for markets to recover lost ground after a fall (based on 90 years of research). Bear markets (long-term declines) last around 24 months before recovering. Acting spontaneously in response to the crash is not what’s required.
The S&P 500 fell almost 60% in the financial crisis/credit crunch of 2007-2009. The day before the crash – October 9th, 2007, when the market closed at a record high of 1565 – was officially the worst day to invest in the index since the 1940s.
The S&P took over four years to recover from that drop, and since then it’s weathered two further declines of over 20%, not to mention last year’s Covid crash (down 34%).
You’d imagine, wouldn’t you, that if you’d been unwise enough to have invested everything in the S&P 500 when it was riding high on 9th October 2007, you’d today be looking at a loss or, at best, meagre returns.
But no. The index got back to its pre-credit crunch high by 2013 and, since then, has risen to its current 4471, despite everything. And your returns, with dividends reinvested, would still have been around 10%: the index long-term average.
Time in the market vs timing the market
The past 14 years have seen perhaps more than their fair share of bear markets but, in the grand scheme of things (i.e., a long-term financial plan), they’re not a major factor. Investing is a marathon, not a sprint, with a horizon that’s well beyond the next few years.
In the age of cryptocurrencies, when real and imagined fortunes are won and lost in the space of days or even hours, taking the view that you’re investing for a return you aren’t expecting to realise for 30 or more years can seem positively prehistoric.
Nevertheless, it works. And even though we can’t predict the future, we know what the data shows.
The longer you’re in the market, the more diversified your portfolio is, and the less you listen to the money media, the greater your chance of your money doing what you want it to do. Which isn’t to double, treble or quadruple every year, but to finance the lifestyle you envisaged for yourself when you started to invest.
As the tortoise said to the hare: slow and steady wins the race.