During the week of February 5th, U.S. stock funds saw a record $23.9 billion withdrawn by investors, the worst outflows on record. The Dow Jones dropped 1,175 points that day, the greatest point drop in the history of the stock market. Since then, we’ve seen much of that recovered in recent weeks.
When we see a downturn in the economy, or a bad week in the markets like the first couple of weeks in February, it’s tempting to look at our own investments and retirement accounts and see how much we’ve “lost”.
For our team here at Summit, we don’t use the word “loss” when the market experiences a downturn. Remember, the only time you lose money when the market drops is when you actually sell your investments.
On the flip side, those who wait to get into the market because they are trying to time it could be missing out on the most important days in the year for gains. JP Morgan did a study that shows that if an investor was fully invested in the S&P 500 from 1993 to 2013, they would have seen a 9.2% annualized return. However, if they had missed just 10 days in the market, and it just so happened that those days were the 10 best days during that 20 year timeframe, their annualized return becomes 5.4%.
Timing the market — trying to determine when it is the best time to buy and sell — is not only nearly impossible to do, it is a bad mentality in the first place. You see, by trying to time the market, you are actually allowing the market to influence your decisions and, in so doing, you become subject to the daily ups and downs on wall street. This is dangerous territory because the stock market fluctuates a lot, and sometimes significantly.
Sticking to a long-term financial plan means turning off the daily financial news. It means remaining confident and sticking to the plan, regardless of the what the Dow Jones does that day.
Look at the response by investors with two different mentalities.
The Dow drops 1,000 points in a single day
Investor trying to time the market: Sudden drops elicit fear / panic. The tendency is to sell.
Investor with a long term plan: Sudden drops mean nothing. Drops are expected. Stick to the plan!
Investor confidence is at an all time high, the markets climb!
Investor trying to time the market: Investors are confident. The tendency is to buy (even if the stock becomes overvalued).
Investor with a long term plan: Happy about the short term gains in the market, but to a long term plan, it means little. Gains are expected. Stick to the plan!
That said, we tend to focus less on the short term stock market performance and more on long-term fund performance, fund manager performance, and investment allocation when making investment decisions for our clients. We fully expect the twists and turns of daily market performance along the way.
Timing the market brings our emotions into investing. When we do that, we are subjecting ourselves to the downsides of normal human behavior. Fear, panic, greed — these are all things that can, and often do dictate our investment behavior and hinder sound judgement.
Did you know that the Dow Jones has only once had a negative 10 year rolling average return? In other words, if at any point since the year 1900, you were to place a dollar in a Dow Jones index fund, and held it for at least 10 years, only one year in over 100 years would you have less than a dollar at the end of that 10 year period. 1928. Any other time in history the stock market as a whole trends upwards.
When it comes to your long term financial outlook, investing in the market is simply a piece of the puzzle. Certainly, short term swings can be unnerving, but if you consider the big picture, and the fact that the markets historically have always rebounded, you’ll find yourself paying less attention to the daily news and more attention to the things within your control.