Focusing on Timing Instead of Time
In the second of a 3-part series on the biggest mistakes investors make, we sat down with Kyle Dana, AGFinancial’ senior vice president of Retirement and Investments, to hear his insights and answers to common questions regarding investing. Read Part One here.
Q: Is timing the market a bad thing?
A: It’s not necessarily bad if you’re doing it right all the time; it’s when you’re wrong that you hurt your performance.
Let me also clarify that the type of timing we are discussing is an emotional timing; a short term reaction to news or sudden market moves. There is a disciplined form of timing which can be a useful tool. Examples of disciplined timing would be periodic rebalancing of your portfolio, or adjusting portfolio allocation based on income needs. For the purposes of discussing mistakes investors make, let’s stick to emotional timing.
Peter Lynch, personal investor and former mutual fund manager once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
To make gains in the market, time, not timing, is the best strategy. To illustrate, look at the stock market (Dow Jones Industrial Average) from 12/31/01-12/31/16. If you had stayed invested the entire time, your average annual return would have been 7.28%. On the other hand, had you tried to time the market and missed just 10 of the best days, your average annual return would have dropped to just 2.60%.† Timing can really hinder your portfolio’s performance.
Here’s another example of how using time and patience can reduce your risk of loss. Over the last 30 years, 1987 to 2016, there have only been 6 years where the market (S&P 500) ended negative for the year. Furthermore, the worst rolling 20-year return of the stock market (S&P 500) between 1979 to 2016 was a positive 6.4% a year! ‡ That was the worst; the best 20-year rolling return during the same time period was 18% a year! I don’t know about you, but those numbers compel me to stay the course and not get too worried about the short term fluctuations in the stock market.
Q: Why shouldn’t an investor sell when their investments decline in value?
A: When you buy and when you sell has a significant impact on your overall performance. Selling a long term investment when it dips is a risky, often emotionally triggered response that could lock in a loss. Let me illustrate. Let’s use a home, to which many can relate. Let’s say you have a great home, solid job, kids are in a good school and you have no reason to move. Then one day you wake up and discover all the homes in your area, including yours, have decreased in value by 25%! Would you place a “For Sale” sign in your yard? You would most likely stay put and wait for the value to increase again because you have no immediate need to move. The same principle is true for long-term investments. A drop in the value may not be a reason to sell immediately. It may actually be a reason to buy more at cheaper prices, depending on your goals and risk tolerance level. Don’t miss the final part of this investment series, Overestimating Your Tolerance for Risk, for a better understanding of the relationship between risk and reward. Sign up below to receive Part 3 straight to your inbox.
FINAL THOUGHT: Accept that the market will go up and down in the short term. Have a long-term investment strategy and stick with it. And most of all…be patient!
If you’re an AG 403(b) investor, familiarize yourself with the investment options available within the plan. From the MBA Income Fund to the multiple stock strategies, there are investment options within the plan for all risk tolerance levels.
This information is not legal, financial, or tax advice. Information is from sources deemed reliable. Information is subject to error, omission, withdrawal, or change. Contact your own legal, financial, or tax advisor before taking any action.
Sources:
www.putnam.com/literature/pdf/II508.pdf
www.thebalance.com/stock-market-returns-by-year-2388543
www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795
Click here to read Part 1 of this series, Investing with Your Emotions.
Click here to read Part 3 of this series, Overestimating Your Tolerance for Risk.
