A reminder that the deadline to file your 2021 tax returns or the extension is April 18.
If you own assets in France (or outside the U.S.), we recommend this
BFM newsletter:
Déclarations Fiscales et Comptes en France
Can you time the market?
As you can read from the March 2020 BFM newsletter (
learn how to make smarter, more informed financial decisions), our emotions can trick us during extreme market downturns and upturns.
We note that in the last thirteen years, since March 9, 2009, $100 invested in a simple U.S. stocks index fund/ETF would have become more than $700.
We have temptations to try to anticipate market movements and invest accordingly. Disciplined investing is difficult during time of volatility. From the late September 2018 to Christmas, U.S. stocks went down 20%. They went back up 47% (as of mid February 2020 before the crash).
Below are five analysis showing the impact of failed market timing during 1930-2020, 1970-2015, 1990-2020, 1997-2016, and 1999-2019.
Good days in the market are unpredictable. Ten of the top twenty five days occurred between September 2008 and December 2008. But the S&P 500 dropped 28.9% during that time.
We believe that market timing is a coin flip and daily market returns are
random.
If you missed the best day during 1970-2015 (more than 11,000 trading days), your retirement assets would have been 10% lower.
If you missed the best 15 days, your retirement assets would have been 60% lower!
Here is
1-minute video from DFA showing the impact of missing some days since 1970.
In addition, timing can increase your costs – especially taxes.
Dalbar, a financial market research firm, examine returns investors received. They find over the past 30 years, investors in equity funds have
lagged the S&P 500 benchmark by an average of 7.27% per year (11.06% for the S&P 500 vs. 3.79% for the investor in equity funds).
A hypothetical investor with $100,000 would watch their investment grow to $305,257 (before taxes) over 30 years at a 3.79% annual rate of return. That same investor, earning 11.06% per year, would end up with $2,326,645 -- more than 7 times as much!
The average mutual fund investor has not stayed invested for a long enough period of time to get the rewards that the market offers disciplined investors. See the
15 biases that make you a bad investor.
An investor who exited the market and subsequently missed just 10 of the best-performing days in the past 20 years would have lost out on more than half of the gains. Given the extreme difficulty of market-timing, a far better course would have been to stay in, with the knowledge that volatility is normal, and that missed upside can dramatically cut into long-term returns.
For the last twenty years, the S&P 500 Index had returned 6.1% per year. According to DALBAR, the average investor had a return of only 1.9% per year.
It is because the average investor buys at the wrong time and sells at the wrong time.
When is the wrong time to buy? When the market is up - when it feels good to invest.
When is the wrong time to sell? When the market is down - and nothing feels good. Emotions play a big role in
decision making.
Market Timing is Not Portfolio Rebalancing
With the recent volatility, the portfolio asset allocation (portion in stocks vs. bonds) has changed. A portfolio that started the year 60/40 (60% in stocks and 40% in bonds) may be now 50/50. A portfolio rebalance means to return to your pre-determined initial portfolio asset allocation.
A 60/40 portfolio in 1926 that would not have been rebalanced may have become close to 99/1 (too risky compared to the initial goal), since stocks have outperformed bonds to such a great degree.
One of the common ways to rebalance is annually. The chart below shows the growth of $1 since 1926 for a 60/40 portfolio rebalanced every January, February, March... The chart below shows that the performance (Compound Annual Growth Rates) is very similar whatever month you choose.
Learn how to make smarter, more informed financial decisions
