Market Timing vs. Putting it in a Drawer
Several years ago, I was watching a New England Patriots football game with my son Michael and his good friend. I believe they were about 10 years old at the time.
The Patriots’ offense was on the field, and it was second down and about a yard to go for a first down. Like many teams, they attempted to run the ball up the middle, but the opponent’s defense responded well and stuffed the ball carrier behind the line of scrimmage.
On third down, the Patriots did the same thing, except to the right, with same exact result. The defense held its ground, and Coach Belichick had to decide whether to go for it on fourth down.
Frustrated, Michael’s friend blurted out, “I don’t get it. Why don’t they just go around?”
In other words, why do they keep running into the teeth of the defense? Wouldn’t it make more sense to try and run the ball outside and around the packed-in defense? (I wonder if Belichick was aware of this strategy?)
Without knowing very much about football, and the strengths and weaknesses of each team, this recommendation appeared to be such an obvious and logical strategy to him!
Obvious and Logical
The same can be true with respect to investing and stock market corrections.
Why would anyone just sit there through a market downturn and “lose” money?
Wouldn’t it be logical to simply sell out, wait for the dust to settle, and then buy back in so you don’t suffer losses?
For clarity, this “strategy” of attempting to sell in and out of investments on a timely basis in order to avoid large short-term losses and capture upside gain is known as market timing. This stems from the commonly held belief, which is perpetuated in Hollywood movies and in many financial shows, that investment success is achieved by the few who are “in the know” who are able to successfully “navigate” in and out of markets at just the right time to their advantage.
It sounds 100% logical. Unfortunately, however, what sounds obvious and logical from afar doesn’t necessarily work in practice.
In his Likely Gains from Market Timing research paper, Nobel-prize winning economist and Stanford finance professor William Sharpe suggested that an investor would have had to be correct on the sell and buy points approximately 74% of the time in order to equal returns earned by continuously holding shares in an index of market securities through all market cycles.
As history has demonstrated, consistently achieving those results appears to be close to impossible.
October 2007 to March 2009
History and distance from traumatic times have a way of providing clarity for future action. However, that’s not always true with investing.
A significant amount of time has now passed since the Great Recession. The financial crisis and traumatic market downturn we experienced over 18 months from October 2007 to March 2009 appears to be a period that anyone should have been able to navigate in and out of successfully.
What we all forget with time, though, is that we didn’t experience that 18-month stretch in one instance. We experienced it one day at a time, and in some instances, one hour at a time.
From October 10, 2007 to March 9, 2009, broad stock market prices fell over 56%. Yahoo Finance
However, it was not a straight line down that was obvious to interpret and act on.
Experiencing Markets on a Daily Basis
During that 18-month timeframe, if you recorded market results on a daily basis, here’s what you would have experienced:
• Market prices closed up 47% of the days, and
• Market prices closed down 53% of the days
Isn’t that incredible! During the 18-month period of time when market prices fell over 56%, markets closed up 172 days and down 197 days.
Given that significant downturn, you likely expected it to be much worse than that with a much larger percentage of down days.
Interestingly, from 1951 through 2024, the S&P 500 Index, a widely accepted proxy for U.S. stocks, closed up 53.7% of the days, and down 46.3%. Crestmont Research
So, as we experience markets on a day-to-day basis, that 18-month period wasn’t much different than the historical average.
What this demonstrates is that our experience is never a straight line up or down when dealing with markets. Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up …
That’s how we experience markets, and that’s what makes market timing extremely difficult as a long-term strategy.
You not only have to make the correct call to sell out, and then to buy in on the correct days, but you have to make those calls at precisely the correct time during each day because prices change all day long. (And, because all asset classes behave and perform differently, you have to make those split-second decisions on each asset class you own.)
Just think of markets in the beginning of this year when the S&P 500 Index fell 15.27% by April 8th, only to turn around swiftly and increase over 33% from April 9th through September 30th. Yahoo Finance
What all of this demonstrates is that there is never a clear and unquestioned signal in the moment when a decision must be made to sell or buy.
That’s why buying into the belief that you can successfully time when to get out and when to get back in can be so destructive to your financial independence.
Put It in a Drawer
After you have set aside five years’ worth of your anticipated withdrawals to support your lifestyle cashflow needs outside of the short-term volatility of stocks, i.e. in money markets and short-term fixed income holdings, the long-term approach with the rest of your retirement portfolio is to remain globally diversified and strategically weighted across several asset classes during all market cycles with a goal seeking to capture the higher expected returns each asset class may offer.
Once you’ve done your homework and you have a solid allocation and strategy in place, “put it in a drawer” and go about living your life.
Go ahead and pull it out of the drawer during pre-determined periods of time, i.e. every six months or annually, and rebalance your holdings back to your original targets.
However, as we have just highlighted, aside from reaffirming the relationship to your financial goals, don’t fall into the trap of thinking that looking at your investments on a daily, weekly, monthly, or even quarterly basis is likely to make you more knowledgeable, provide you with any signals to act on, or produce better results.
This approach can help you remain confidently invested for the long-term even through expected, yet temporary, stock market corrections.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only.
Jack Phelps
Managing Partner / Financial Advisor