Timing the Market Isn't Worth Your Time

By: Craig Fehr, CFA July 01, 2019

The bull market is in its 10th year, and with age, market fluctuations have become wider and more frequent, as have predictions of the bull market’s demise. Market volatility – particularly pullbacks like we experienced in late 2018 – can be unnerving, prompting investors to make untimely decisions, becoming too aggressive when markets are high and too cautious when they’ve fallen.

Time is on your side

Historically, bull markets have lasted more than five times longer than bear markets, with an average return of well over 200%1, supporting the case for letting your investments grow over time. While the current expansion is one of the longest on record, we believe it’s still viable.

Remember, conditions are cyclical, and a bear market will emerge eventually. But instead of attempting to “time” the market, we think staying invested and periodically adjusting your portfolio based on your long-term goals can put you in a better position to stay on track over time.

Use hindsight to your advantage

Market fluctuations are inevitable. But instead of trying to avoid pullbacks, take advantage of them. Many of the best days in the stock market often follow the worst periods, so once they’ve occurred, look for opportunities to rebalance and buy into the dips.

Over the past 40 years, missing just the 30 best days in the market reduced the average annual return by roughly half.2 So while attempting to call the peaks seems like an attractive way to avoid the declines, unless you manage to pick the exact bottom of a downturn to reinvest, you’re likely to miss out on important, sizable gains. For example, the 19% stock market decline in late 2018 was followed by the strongest first-quarter return in 20 years.

While stocks have endured six pullbacks of 10% or more in the past decade, the average return over the following 12 months was 23%. More broadly, since 1948, the average returns in the year before and the year after historical bear markets were 24.1% and 46.5%, respectively – gains that easily would have been missed in an attempt to time the market.

Don't follow the crowd

When it comes to investing, there isn’t necessarily safety in numbers. A recent study by Dalbar shows average investor returns have underperformed a buy-and-hold benchmark over the past 30 years. Why? Emotional reactions often lead to attempts to time the market – chasing gains and selling after declines have already occurred.

Source: Dalbar, QAIB 2019. Annualized return for the past 30 years ending 12/31/2018. The Equity Benchmark is represented by the S&P 500. The Fixed-income Benchmark is represented by the Barclays Aggregate Bond Index. Returns do not subtract commissions or fees. This study was conducted by an independent third party, DALBAR, Inc. A research firm specializing in financial services, DALBAR is not associated with Edward Jones. Past performance is not a guarantee of future results.

While the day-to-day news and swings in the market may be distracting, it’s important not to lose sight of the bigger picture upon which your long-term financial strategy is built. You can’t control market moves, but you are in complete control of your reactions to them. Constructing a portfolio that is aligned to your situation, and then making sound investment decisions and adjustments along the way, can put you on a steadier path toward achieving your financial goals.

Important Information:

1 Source: Average total return of the S&P 500 since 1949. Excludes late 2018 correction since next 12 months of data is not available.

2 Source: Ned Davis Research, Edward Jones calculations, measured by the total return of the S&P 500 since 1980.

Past performance is not a guarantee of future results.

The S&P 500 and Barclays Aggregate Bond Index are unmanaged and are not available for direct investment.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.

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