By Steve Tepper, CFP®, MBA
With the Russian Bear Market (copyright pending) on us, we have yet another opportunity to talk about the folly of market timing. As I am writing this article on May 21, 2022, capital markets have just concluded eight straight weeks of losses, with the S&P 500 passing the mystical 20% decline mark that prompts economists to declare that we are in a bear (downward-trending) market.
1. In US dollars. For illustrative purposes. Best performance dates represent end of period (Nov. 28, 2008, for best week; April 22, 2020, for best month; June 22, 2020, for best 3 months; and Sept. 4, 2009, for best 6 months). The missed best consecutive days examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best consecutive days, held cash for the missed best consecutive days, and reinvested the entire portfolio in the Russell 3000 Index at the end of the missed best consecutive days. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
As our seasoned clients well know, we are invested for the long haul and see no reason to change our investment strategy. The risk of market timing, or moving to the sidelines when markets decline, is illustrated in the chart on the right.
The chart tells us the return you would have gotten for a diversified investment in the largest 3,000 U.S. companies over the last 25 years—a tenfold return on your money! But just missing a few poorly timed days or weeks would have cost you severely, erasing large chunks of that total gain.
Now pay close attention to the specific dates that are excluded: One week in November 2008, March and April of 2020, March through June 2020, and March through September 2009. These four periods all occurred in the midst of the two steepest market declines on record for that 25-year period!
This is not a coincidence. Steep market declines signal periods of high market volatility, and during those periods, we expect markets to also intermittently show large increases. And that is just what happened in November 2008 after September and October saw markets in freefall following the collapse of Bear Sterns and a worldwide credit panic. It is also what we saw after markets finally hit the bottom of the Great Recession in March 2009 and quickly came roaring back over the next six months.
Similarly, the other two time periods are overlapping and follow the “Month from Hell” at the beginning of the Covid pandemic and ensuing market panic in March 2020. As soon as that panic wore off, markets roared back with their best month in April and two more high-return months in May and June.
The bottom line is this: We have no evidence that market timing is an effective strategy for long-term investing success, but there is evidence it is even more foolhardy following a steep market downturn. While we have no guarantee of the future, we’re better off staying invested, with reasonable expectations of outstanding performance to come.
For more on the Russian Bear and its potential investing impact, check out our article “Why Geopolitics Shouldn’t Change Your Investment Strategy.”
Chart provided by Dimensional Fund Advisors. Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.