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Timing the Market, or Time IN the Market?

Timing the Market, or Time IN the Market?

| June 23, 2022

With all major stock indexes now in bear market territory for 2022, it is normal that investors would start to question some of their decisions and their allocations.  But, as we have previously written, humans are wired to "protect what's ours", not to think long term.  When things are broken, our tendency is to try to fix them. 

That's not always in our best interest, but those animal instincts are strong.

Our friends at Bank of America tried to put things into perspective earlier this year with a short strategy note titled Time In The Market Is Still Much More Important Than Timing The Market.  We've seen these points made many times before and think they are worth highlighting now.

"We have long said that it was discipline in portfolio construction that got investors through the pandemic-led crisis of 2020―not market timing. The latter is a fool’s errand and can be costly.

Indeed missing the 10 best days in the market each decade can be painful. In Exhibit 1, we look at the S&P 500 back to 1930 and find that missing the 10 best days of each decade would have meant a return of just 60%, instead of 22,120% if you had stayed invested through all the ups and downs of the market.

Also, the probability of loss over a full decade of investing is just 6%.

If we zoom in and look at market returns since January 1, 2020, missing the 10 best days would result in a negative return of –16%, compared to a price return of 50% by simply remaining invested―despite the sharp bear market decline of February/March 2020. Investors who lengthen their time horizons also have historically experienced lower average equity return volatility." 

Bank of America, Office of the Chief Investment Officer

As the exhibit below shows, being out of the market for just the ten best days each decade can be painful.  That's because the best days often follow the worst ones.

Exhibit 1: S&P 500 Returns Over The Decades.

Decade          Price return       Excl 10 Best Days
1930                       - 42%                    -79%
1940                         35%                     -14%
1950                       257%                    167%
1960                         54%                      14%
1970                          18%                    -20%
1980                       228%                    109%
1990                       316%                     186%
2000                      -24%                     -62%
2010                       190%                      95%
2020 – 2021           50%                    -16%
1930 – 2021      22,120%                    60%

Source: BofA Global Research; Chief Investment Office. Data as of December 31, 2021. 

Just imagine how easy it was to be be bearish in 1930. The country was still in the midst of the Great Depression, while simultaneously setting investors up for life-altering returns over the coming years. This is not to say that investing in 1930 (or June 2022) would immediately result in a positive outcome.  But it does say that being occasionally "out of the game" (and letting inflation erode your purchasing power over time) would have been a disaster. 

Think about this:  What does that 1930's dollar buy us these days, anyway?  (Hint:  An apple cost about a nickel.)  No, one can't stay on the sidelines.  If you believe that companies grow, and understand that they share that growth with you through dividends, then buckle up that chin strap.  The cost of being in the game is an occasionally bumpy ride. 

The cost of not being in the game is even worse of the long run.