Can the market be successfully timed?
Staying the course, and staying invested, is perhaps the most important aspect to long term wealth creation - but it is not always easy.
When markets experience a drop, investors may be tempted to sell and sit on the sidelines. They do so out of fear of further decline and are confident that they can buy back in to the market once the smoke has cleared. History, and experience, proves this to be the wrong course of action.
The chart below shows the impact of an investor selling out of stocks after each of the 20 worst days over the past 10 years, and then deciding to buy back in to the market later at various intervals.
The green bar represent an investor who remained fully invested and did not panic sell. The blue bars represent investors who panicked, sold out of stocks, and waited before buying back in to the market. It didn't matter whether you waited one week, one month, or one year, your returns suffered as a result of selling. Since exiting involves deciding when to re-enter, this ultimately results in worse performance than simply staying invested. If you sold inside of a taxable account, you may have incurred tax as a result of the sale.
Over the past 30 years, the stock market (as measured by the S&P 500) routinely experiences a sharp drop, every year, for a myriad of reasons. Many investors are familiar with this concept, but are still caught off guard every time it happens.
In the chart below, the blue bars represent the total return for the S&P 500 each year for 30 years. Above the bar is the percent return for that year. The red dots represent the largest market decline for that given year. The good news is that despite large declines happening annually, markets tend to end each year in positive territory.
Here is an example from 2012 to help illustrate the point.
From April 2012 to June of 2012 the US stock market (as measured by the S&P 500) declined 10%. Markets tend to go down faster than they go up, and a 10% decline in 3 months was enough to worry investors. However, markets rallied towards the end of June, the S&P began to climb and ultimately ended the year up 16%. If you sold at or near the bottom, and waited to get back in, you missed out.
The lesson learned should be: Stay invested, stay the course, and don’t try to time the markets.
Turbulent markets are troubling. That's why we are here. You should feel free to reach out to us at any time with your questions or concerns.
Brickley Wealth Management (“BWM”) is a Registered Investment Adviser. This brochure is solely for informational purposes. Advisory services are only offered to clients or prospective clients where BWM and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by BWM unless a client service agreement is in place.