Stock market corrections are scary. Watching your money seemingly disappear is very stressful. This past year has taken us all on a painful ride. We have had difficult months even as recently as May 2019.
So, the million-dollar question is,…
“Why can’t we pull money out of the market before the market decline and reinvest the money after it’s over?”
John Bogle, the late founder of Vanguard says it best; “The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently.”
Even though the evidence overwhelmingly proves that time in the markets is more important than timing the markets, people still try at every market downturn.
To make matters even more difficult, it is likely the worst is behind you by the time you sell, thus locking in your losses. This is especially punishing for investors that may want to move to cash when the markets decline. Furthermore, stocks typically generate the biggest gains in the first 12 months of recovery and missing even the first month can lead to substantially lower gains in the long run.
The chart below, from the Schwab Center for Financial Research, shows the real cost of moving to cash when the markets are down.
May and June 2019 is a great example.
June 4th through June 7th the S&P 500 Index returned about 5%. The entire month of May, the S&P 500 was down about 6.3%. Almost an entire months worth of losses were erased in four days of trading! Clearly missing a few days of strong returns makes a huge difference in your return over the long term. The chart below illustrates the effects of missing the 25 best days in the stock market; over a 27 year time period your annualized return would be more than cut in half; from 9.81% to 4.53%.
I’m constantly amazed to see these statistics and numbers repeated over and over again in the markets. This is why investing can be very simple, yet very difficult to execute successfully. It’s important to not react emotionally and instead rely on statistics and your comprehensive financial plan to carry you through the tough times.
We are always available for your questions! Don’t hesitate to call, 865-240-2292.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 06/19/2019 and are subject to change at any time due to the changes in market or economic conditions.