Market timing – as tricky as ever

The recent market volatility surrounding Brexit had the potential to rattle investors’ nerves. The day after the referendum (Friday June 24), markets around the world reacted strongly: the Russell 1000® Index was down -3.6% for the day and down another -1.9% on Monday June 27. Many investors were tempted to pull their money out of the market until the situation settled down again.

Here’s the thing: It’s hard to correctly time the exit at the top and the re-entry at the bottom of the market. Oftentimes, reversals are quick and unpredictable and the market has picked up steam again by the time nervous investors feel confident that everything has settled and it’s an appropriate time to re-enter.

These mistimings can have a significant impact on portfolio returns. As the chart below shows, an investor who missed the past decade’s 10 best market return days would have given up half the portfolio return they could have earned if they had been invested for the entire 10-year period.

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.

Of course, the reverse is also true. Missing even just one of the decade’s 10 worst performing days would have helped boost portfolio returns; that portfolio would be worth more than double ($43,354 instead of $20,622) that of a portfolio that had been ‘invested all days.’

If we extend the number of ‘missed days’ to 20, 30, even 40, the difference is striking:

  • An investor who missed the 40 best days over the last 10 years was left just 34% of their original portfolio value.
  • An investor who missed the 40 worst days enjoyed a portfolio value worth over seven times more than the value of a portfolio that was ‘invested all days.’

Time those exits and entries correctly and you’d be a rock star!

In the case of the market’s short-term reaction to Brexit, within a week, stock markets had settled down again (at least temporarily), with the five post-Brexit result trading days ending at just -0.7% — a marked improvement from where they stood just days earlier. Although Friday, June 24 may have felt like one of the worst market return days in the last decade, it didn’t even register among the top 10, 20, or 30 worst market days.

In contrast, August 24, 2015 was one of the markets 30 ‘worst’ days in the past decade. The market experienced a sell-off of -4% that day in reaction to weak Chinese economic data. That rattled a lot of nerves. But just two days later, the market experienced one of its 30 best days on August 26, 2015, when the Russell 1000 Index was up over 3.7%.

This pattern of quick reversals between best and worst days has been repeated frequently over the past 10 years. Correctly timing when to get out of – and back into – the market is tricky. Get out right after a ‘worst’ day, and one might not get back in soon enough to catch a ‘best’ day.

The Bottom Line

Short-term volatility can be nerve-wracking. But, trying to avoid being invested on the bad days and catching only the good days requires making two decisions correctly: 1) knowing when to get out of the market, and 2) 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 short-term market gyrations, a well-thought out ‘stay invested’ investment plan may prove more successful in achieving long-term outcomes.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

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.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

The Russell logo is a trademark and service mark of Russell Investments.

Copyright © Russell Investments 2016. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Financial Services, Inc., member FINRA (www.finra.org), part of Russell Investments.

RFS: 17598

  1. No comments yet.

Millennials are the future.
Engage them now.

Millennial InvestorSubscribe to the Helping Advisors Blog and receive a free copy of the Millennial Investor.

We will only use your email for Helping Advisors Blog updates.