I’ve talked to a few people the past couple of weeks who are unsettled with the recent market pullback.
They have doubts.
They are wondering what they should do with their portfolio. They ask things like “should we seek higher ground until the coast is clear?”
But do these stressful times justify market timing?
It’s certainly understandable if the economic uncertainty unfolding in the daily news has left many of us wondering – or worrying – about what’s coming next. No matter how you feel about current events, it’s hard to deny that the prospect is currently causing considerable market turmoil.
Regardless of how the coming weeks and months unfold, are you okay with gritting your teeth, and keeping your carefully structured portfolio on track as planned? This probably doesn’t surprise you, but that’s exactly what we would suggest. Unless, of course, new or different personal circumstances arise.
Here are four important reminders on the perils of trying to time the market – at any time. It may offer brief relief, but market-timing ultimately runs counter to your best strategies for building durable, long-term wealth.
Market-Timing Is Undependable.
Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. Do people remember year-end 2018, when markets dropped precipitously almost overnight? Many investors wondered whether to expect nothing but trouble in 2019. As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall.
The same goes for March of 2020. And March 2009. And September 2001. In any of those cases, had you gotten out then, you might still be sitting on the sidelines wondering when to get back in. The same could be said for any market-timing trades you might be tempted to take today.
Market-Timing Odds Are Against You.
Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst.
If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns. Not to mention, trying to figure out “when to get back in” is equally as difficult as timing “when to get out”.
Market-Timing Is Expensive.
Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous.
And let us not forget about the wash-sale rule. This essentially says that if you buy back the same security within 30 days, you can forget about using any tax loss you might have taken. So if you really want to buy something back, you’d better be sure you wait until 31 days have passed.
Market-Timing Is Guided by Instinct Over Evidence.
We’ve mentioned this before, your brain excels at responding instantly – instinctively – to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve.
We’d like to think one of the most important reasons that our clients hire us as their financial advisor is to help avoid just these sorts of market-timing perils.
More so during just these tempting times. The FOMO (Fear of Missing Out) is off the charts. Everyone thinks they need to do something.
Even if everything is done “right” in theory, we still cannot guarantee success. But we are confident that sticking with your existing plans represents your best odds in an uncertain world.
So for those of you who have doubts, please let us know. We’d love to explore various real steps you can take to shore up your investment resolve, regardless of what lies ahead.
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