Timing is tricky

August 13, 2013 Categories: Portfolio Corner
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Market-timing is difficult, and the risk of being wrong is too high. It is not at all unusual for a market-timer to mistime the market and get out too early (or get back in too late), missing further growth opportunities. Investors can make—but also lose—a lot of money trying to make such predictions. As the chart shows, even missing a handful of the best days in the market can have a surprisingly negative impact on the value of an investment.

The importance of staying invested

Source: Russell 1000® Index. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. This hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. Investments do not typically grow at an even rate of return and may experience negative growth.

If an investor missed the best 10 days in the market (represented by the Russell 1000® Index) over the course of the last 10 years, their return would be half that of an investor who was invested all days. To be fair, if one missed the 10 worst days, their portfolio value would be double the ‘invested all days’ portfolio. That’s a big swing (half to double) in portfolio values from timing.

The tricky thing is the timing. Do investors know when to get out and back into the market? What I find interesting is that in looking at the best 10 days over the last 10 years, 8 of those days closely followed 9 of the worst 10 days; often right after. For example the 4th worst day (which coincidentally followed a string of other ‘worst’ days), October 9, 2008 when the Russell 1000 Index returned -7.53%, was followed two days later by the best day, October 13, 2008 when the Russell 1000 Index returned 11.67%. If investors pulled out (and stayed out) on October 9th because they thought they could time the market, they would have missed out on the best day the market had had in the last 10 years.

The bottom line

Create context for your clients

Timing the market requires two decisions – knowing when to get out of the market, and knowing when to get back in to the market. They’re both difficult calls to make. Rather than reacting to volatility and trying to time the market ups and downs, a well-thought out ‘stay invested’ investment plan may prove more successful in achieving outcomes.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, representative of the U.S. large capitalization securities market.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

RFS 11194-a

  1. avatar
    August 22nd, 2013 at 09:56 | #1

    Nice chart here. Could you provide the opposite chart as well with “missed the 10 worst days” and other? How much better off would an investor have been in those situations?

  2. avatar
    Natalie Miller
    September 12th, 2013 at 09:01 | #2

    Thanks for your question! If an investor had been able to perfectly time being out of the market for the worst days they would, not surprisingly, have been significantly better off than if they had been invested all days.

    According to our analysis, missing the 10 worst days would net an investor double the value of being invested all days. Missing the 20 worst days would result in more than three times the value, and missing the worst 40 days would result in over seven times the value of being invested all days!

    But remember, timing requires two decisions: when to get out AND when to get back in. Many of those ‘worst’ days were followed shortly by a ‘best’ day. In our experience, it’s really hard to make both decisions correctly on a consistent basis, and that’s why we continue to believe in sticking with a diversified investment plan, even through the short-term gyrations of the market.

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