While speaking with friends and prospective clients lately, I’ve been hearing a recurring theme that with the upcoming election and current economic conditions, they are waiting to invest in the stock market. How does anyone know if the stock market will go down in the near future for those or any other reasons? The simple answer is, they don’t know. Study after study shows that trying to time the market is just about impossible, yet individuals and professionals still keep trying.
Equities: Investing for the Long Term
By Larry Heller, CFP®, CPA
Larry Heller & Associates
In a study conducted by JP Morgan on the S & P results spanning from January 1st 1995 through December 31st 2014, missing the top ten days in the market lowered your annual return from 9.85% to 6.10%. In other words, the study demonstrates that if you are out of the market and avoid negative turbulence, historically speaking, the positive snap back in the market happens within a two week period. The six best days occurred within two weeks of the ten worst days. In addition, when you couple negative returns with a grim outlook, people are much less likely to get back into the market, which results in the person missing out on the top 10 days.
When it comes to stock market investing, I’m more in favor of the pre-computer days. The only way to determine the valuation of your portfolio back then, was to wait for the next morning’s paper. From there, you would look up the price of your mutual fund (or stock) and simply multiply that number by the amount of shares you have. After doing this for all of your holdings, you could determine your current value. Since you wouldn’t have been doing this every day, you would not immediately see how much money you lost or gained for that day. Now, with today’s technology, you can get instant notifications of changes with your portfolio. I ask my clients all the time, “Do you sit there and look at the value of your house daily, monthly, even annually? So why do you look at your investments?”
Despite updated technology in the industry, when investing in the stock market, you should not be focused on short term fluctuations. If you need the money in the short term, you shouldn't be invested in the stock market to begin with. Most individuals do understand that looking at your portfolio daily is too much, but even a one year time period is too short to gage portfolio performance.
Over the last 90 years, the S & P has had a positive return in 66 of those years (See exhibit A pictured below). That means that for more than 7 out of 10 years, the S & P was up. But it also means there were almost 3 out of 10 years that the S & P went down.
Although no one likes it when their stock portfolio is down, it is part of the normal cycle. In conclusion, don't try to time the stock market. Invest in the market for the long term.