Why You Shouldn’t Time The Market

donald-trump

The rhetoric before the US election was that Donald Trump would ruin the world economy if he won. There was talk about how protectionist measures to destroy free trade agreements around the world and build walls around America would stunt economic growth and bring us back to the dark ages. The markets reflected that. Just before the election, as the polls showed him gaining ground on Hilary, the stock markets dropped for 9 consective days. We were all preparing for the doom and gloom to come.

Those that feared the worst was to happen did what any overly emotion investor would do: Sell everything and go completely to cash. In the minds of a pessimist, there is nothing as safe as cash, gold bricks, canned beans and perhaps an underground bomb shelter. That’s exactly what fear brings. The need to have guaranteed investments. Only to figure out that guarantees provide little to no return. Those that were trying to make money from fear were shorting the market and trying to buy back in  after the dust had settled. What did happen when Trump won was a surprise to everyone.

timing

Investors that sold prior to the election and trying to be defensive got the biggest “I told you so” of all. Markets didn’t tank even though during the day of the election it seemed like stocks were going to fall through the floor. When investors digested what it meant to have President Trump in office for the next 4 years, the markets took off and followed up with a 3%+ gain for the week.

So just how bad were the consequences for those that sold their entire portfolio? Consider that for the entire year the S&P 500 is only up around 5.9%. By selling your entire investment portfolio, just because everyone was saying it was the end of the world, meant that over 50% the gains for this year were missed. Isn’t it funny that that person you know that sold their portfolio will now state that the “market is rigged against him”. Someone is out there to steal his money. If he left it in there the market would have tanked 10%, but because he sold it went up 3%. Well, let me say this. Those are just excuses. There’s no one to blame but himself. Those choices were made by someone with irrational behaviour, in an overly emotional state and didn’t understand the risks of their portfolio.

Missing The Gains

History has proven that missing out on the best days of the year in investing could have dire consequences for the overall return of the portfolio. In the last 50 years, if you invested and took your money out for the best days during that period the difference is staggering.

Returns would drop from an annual rate of 6.7% to 3.4%. Hey guess what? That’s exactly what happened the last week!

Some people like to argue about trying to avoid the worst possible days instead. So what happens then?

Missing the worst days over the last 50 years means an average return of 11% a year instead of 6.7%. That’s pretty amazing if you tell me, but the problem with this scenario is where do you get one of these?

crystal_ball.jpeg

If you don’t have a magical crystal ball perhaps you’re the next incarnation of Dr. Strange and you have some strange magical ability to shift time (definitely drop me an email quickly if you can, we should talk) because unless you can accurately predict when the best and worst days will occur you could be playing a losing game. It’s better to just buy and hold. So what’s so bad about a 6.7% annual gain?

Correct By Re-Balancing

solar-calculatorRather than guessing and trying to time the market, it makes more sense to take a more analytical approach to our investment strategy. This removes the emotional aspect related to investing and ensures that the decisions we make to our investments are actually following a strategy that we initially implemented.

If you’ve read this blog enough, you should know by now that the best way to adjust for wild price fluctuations is to re-balance your investment portfolio. Thankfully we don’t need a magical crystal ball to help us with this task because the device that we need has already been invented over 50 years ago. It’s called a calculator.

I’ve written many articles on how to re-balance your portfolio and the benefits of re-balancing so there shouldn’t be an excuse why you shouldn’t do it.

Prudent and patient long term investors know that re-balancing an investment portfolio is the best way to combat volatility. This form of activity has a side effect similar to timing the market, but it doesn’t require us to guess. We just need to know what our original asset allocations were and make sure that we maintain it. With discipline and perseverance even the worst of days will seem like a small blip in our long term investment goals. So stop trying to guess, spend your free time enjoying the other things in life because time is something none of us can buy.

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