When we look at past performance in the stock market, there’s an assumption that 100% of your money is in the market that guides us to future portfolio values. But what if you don’t have 100% of the money in the market and you sell or move to cash at certain times out of fear? How much time are we actually in the market because we feel compelled to sell? Do you get out when the going gets tough and stay out for a period time or do you stay the course with the design of your portfolio and long term objectives?
During 1980 through 2015 the S&P 500 returned an annualized 12.5%. However, if an investor missed 20 of the best days in the market they would have only earned 7.2%! Think about that. If you moved your money to cash at the wrong time and missed the 20 best days in the market during that time, you would have only averaged 7.2%! What if you missed more days? How about missing the best 30 days? If you missed the best 30 days, then your average return was 5.3%. The best 40 days? = 3.7%.
The point here is you could simply be really unlucky and get out of the market right before it heads back up and miss the bulk of the markets return. The best approach is to invest long term and not try to time the market.
Its time in the market that matters not timing the market.
It's easy to get caught up in "the next best thing", but keep in mind, nobody has a crystal ball. Nobody can predict the direction of the market. Sure, you can get lucky a time or two, but it rarely happens on a consistent basis. Follow the pattern that works and what history has taught us to be successful. In future posts I will examine how to achieve this through proper assets allocation strategies and offer up several other ideas.