Broker Check

Blind Spot #6: Missing the Best Days

| April 18, 2019
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Welcome back to our series of blogs on Blind Spots! We all have Blind Spots, things that are potentially hazardous that we don’t even see, things that we should know, or have awareness of, but don’t. This series of blogs focuses on common financial Blind Spots that we see when working with our clients.

Every so often we talk with people who tell us that they move money in and out of the market. When they feel the time is right, they move their portfolio into cash investments. When things “settle down,” they move back into the market. Still others tell us that they follow newsletters that advise them when to move money in and out of the market. The appeal of market-timing is obvious - improving portfolio returns by avoiding periods of poor performance. However, timing the market consistently is extremely difficult.

Here’s the truth. If there was a way to forecast the times to move money in and out of the market, it would be taught in graduate school. It would be taught during various certification processes. Someone would have a Nobel Prize based on the research. It would be common knowledge. The bottom line is that trying to time the markets can have disastrous consequences. Here’s why:

Investors who attempt to time the market run the risk of missing periods of exceptional returns, leading to significant adverse effects on the ending value of a portfolio. Almost all big stock market gains and drops are concentrated in just a few trading days each year. If you miss even a handful of them because you’re trying to time the market, you may likely dramatically lower the overall return on your investments.

That’s the Blind Spot: Understanding the financial impact of missing the best trading days. Check out this chart that shows the impact of missing the best trading days in the market from 1999-2018:

 

Returns based on Ibbotson® Large Company Stock Index  USAA: https://content.usaa.com/mcontent/static_assets/Media/MS_Article_Cost_of_Market_Timing.pdf?cacheid=2262203991_p

If you missed the best 20 days out of a total of 5,305 trading days (.37% of the days), your portfolio return would have been negative. If you missed the best 50 days out of a total of 5,305 trading days (.94% of the days), your portfolio return would have been -5.9%Hello Blind Spot!

Remember, the best trading days are often not far away from the worst trading days. Investors who are out of the market for any period of time can expect to lose money relative to a simple low-cost and tax-efficient buy-and-hold strategy. Even though it can be difficult, it’s crucial to avoid panic selling when the market struggles. As the saying goes, "It's all about time in the markets, not timing the markets."

Remember, “you don’t know what you don’t know.” Without being aware of your financial Blind Spots, it is almost impossible to make sound financial decisions. At Second Half Strategies, we try to identify and help you uncover your various financial Blind Spots. Our Wealth Management process includes Planning, Guidance and Advice. By following our process, you should have the confidence to know that you are taking proactive steps to uncover and potentially reduce your Investment Blind Spots!

What process are you using to find and address your Blind Spots?

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 

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