“What goes up, must come down … Spinning wheel, got to go round”
The lyrics of this classic Blood, Sweat & Tears song from 1968 could very well describe the day-to-day volatility of the financial markets. One day the markets are up, and the next day they’re down. Then they’re up again, then down again, and so it goes — week after week, month after month, year after year.
So how should you as an investor react in the fact of this constant market volatility? It can be tempting to try to make moves designed to time the ups and downs of the markets and profit from volatility. After all, how hard can it be to “buy low and sell high”?
The answer: A lot harder than it looks. Market moves tend to only be obvious in hindsight. The reality is that if it were so easy to time the markets and profit from volatility, everybody would be doing it.
A Fool’s Game
History has shown that trying to time the markets in order to increase investment returns is a fool’s game. It’s almost impossible to consistently predict when a falling market is going to rebound, or when a rising market is going to fall, and then make subsequent investing decisions. By the way, this holds true for investing pros as well as average Joe’s.
One study looked at the 20-year performance of a hypothetical $10,000 invested in the S&P 500 Index between 1994 and 2013. If left untouched and all dividends reinvested, the money would have grown to $65,475 after 20 years. This represents an average annual return of 9.85%.
But if an investor moved in and out of the markets trying to guess when they would be going up and down and missed the ten best days of market performance during this time, the investment would have grown to just $32,676 and the average annual return would have fallen to 6.10%. Worse yet, if the 20 best days of market performance were missed, the investment would have grown to just $20,361 and the average annual return would have fallen to 3.62%.
Looking back, it’s usually easy to see why the markets soared on the good days and tanked on the bad days. But in reality, only luck and coincidence could account for an investor being in the market on the best performing days and out of the market on the worst performing days. And luck and coincidence aren’t a good foundation upon which you should build your investment strategy.
Take a Long-Term View
Rather than trying to time the markets, a better strategy for dealing with market volatility is to adopt a long-term perspective when it comes to your investments. This requires ignoring the short-term volatility that is inherent in the markets — which can be easier said than done.
After all, we live in an age where the daily ups and downs of the Dow Jones Industrial Average, the S&P 500 and the Nasdaq are posted everywhere you look. And, of course, there is a non-stop parade of supposed investing experts on the Internet and 24/7 cable TV telling us how we should move our money in and out of the market.
If all of this information tempts you to try to take advantage of market volatility by timing the markets, then turn it off and tune it out! Instead, work with your investment advisor to create a long-term investment plan and then stick to it — regardless of short-term market volatility.
Together, you and your investment advisor will determine an appropriate asset allocation based on your investment goals, time frame and risk tolerance. Then you will meet on a periodic basis to see how the plan is progressing and make tweaks to your asset allocation as circumstances warrant. However, changes are made only with your long-term objectives in mind — not based on short-term market volatility.
Give us a call if you’d like to schedule an appointment to discuss managing market volatility and asset allocation in more detail.