May 13, 2020

This paid piece is sponsored by The First National Bank in Sioux Falls.

By Adam Cox, chief wealth management officer

One of my all-time favorite investment expressions seems appropriate to talk through right about now. That expression is: “Time in the market is more important than timing the market.”

The expression essentially pits two competing investment philosophies against each other – market timing versus buy-and-hold investing.

According to Investopedia, market timing includes actively buying and selling to try to get into the markets at the most advantageous times while avoiding the disastrous times.

Compare this with its definition of buy-and-hold investing, which involves buying securities to hold for a long-term period – although Investopedia correctly notes that the definition of long term varies based on the investor.

Research shows time and time again that long-term, buy-and-hold investing outperforms market timing, and much of that has to do with, well, timing.

Market timing as an investment strategy is incredibly appealing because it makes cognitive sense. The lure of getting in at just the right time or avoiding downturns may tempt even the most disciplined, long-term investors. But attempting to time the market is extraordinarily difficult – some might argue it’s nearly impossible and more likely based on luck than skill.

To successfully time the market, you have to get it right twice: first, when to get out and second, when to get back in. And then you have to get this right repeatedly throughout the future as market conditions change. If you study the track records of the most astute and sophisticated professional investors, you’ll find that even they rarely get it right. History has shown no reliable way to identify a market peak or bottom. The market’s best and worst periods are often concentrated in a short time frame and many occur without warning.

The impact of missing just a few of the market’s best days can be profound. Imagine you had invested $1,000 into the S&P in 1970 and contributed nothing more. If you had left that initial investment alone through good times and bad – and there were plenty during the past 50 years – your investment would have been worth $138,908 by the end of August 2019. But what if you missed just five of the best days during that period? Your investment would be worth $90,171, or 35 percent less than the buy-and-hold outcome. And if you missed the 25 best days, your initial investment would be worth only $32,763, or 76 percent less than the buy-and-hold outcome.

To further complicate the picture, many of the best days in the stock market occur near the worst days, so avoiding one means avoiding the other. The most fearful market drops often are followed by the largest relief rallies as investor emotions swing from one extreme to the other. Sound familiar? We are living it right now. The investors who adhered to a buy-and-hold strategy fared much better than those who did not, but how do they do it? Having realistic expectations is the first step.

Downturns are not rare events – they are inevitable. According to research published by Vanguard, since 1980 there have been:

• 12 market corrections – defined as a decline of 10 percent or more.
• Eight bear markets – declines of 20 percent or more, lasting at least two months.
• Five recessions – declines in economic conditions for two or more successive quarters.

But in every case, the markets have recovered and gone on to new highs. Remember how jarring the Great Recession of 2008-09 was? Each day we were inundated with imminent bank failures and bailouts, people losing their jobs and record numbers of foreclosures. What followed was history’s longest bull market. And while it already seems like a lifetime ago, the S&P 500 was up over 31 percent last year alone! The good ol’ days…

Negative market conditions can put our near-term financial goals in jeopardy and can, therefore, make us feel like we have to do something. However, doing something drastic – especially during times of heightened emotional stress related to job security or personal safety – can have negative long-term financial consequences.

Rather than trying to time the market, we’re sharing some other small things you can do during this time to stay on track with your near- and long-term financial goals. You can find them on our website.

Market conditions like those we’ve experienced the past few months can challenge even our most fundamental views on investing.

During times like this, it’s important that we remember we’ve been through difficult market conditions before, and we will experience challenging times again in the future. Adhering to time-honored principles of good financial planning coupled with a buy-and-hold investment strategy can help us weather any market condition – good or bad. If we can help you during this time, please contact us.

Any comments, insights, or strategies discussed in this piece are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything written here, please consult with your attorney, CPA and/or your financial adviser.