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With the volatility we\u2019ve seen in today\u2019s bear market, many investors are feeling the urge to time the market. Here\u2019s why that is a mistake and what you should keep in mind instead.<\/p>\n
The strong equity returns of 2020 and 2021 seem a distant memory as investors contend with\u00a0a bear market<\/strong>\u00a0and stomach-churning market moves.\u00a0 Market volatility can wreak havoc on investor emotions, creating the temptation to trade in or out of the market based on the latest developments.<\/p>\n Investors should fight the impulse to time the market, as over the long term\u00a0whether<\/em>\u00a0you invest is far more important than\u00a0when<\/em>\u00a0you invest.<\/p>\n Although today\u2019s bear market may feel worse than prior bear markets, there are important historical patterns that may be instructive today.\u00a0 Investors should also reconsider the most frequently used definition of risk, as market volatility may be the wrong definition of risk for many investors.\u00a0 With that in mind, here are three investing truths that could be helpful right now.<\/p>\n Truth: Long-term market returns include periods of poor returns<\/strong><\/p>\n Stocks rarely rise without experiencing setbacks along the way.\u00a0 Since 1980, calendar year returns for the S&P 500 Index were positive in 32 of the 42 years. \u00a0However, during that 42-year period, the S&P 500 index had an average intra-year decline of 14%.<\/p>\n For investors saving for long-term goals, such as education and retirement, longer-term returns are more relevant than annual returns.\u00a0 Since 1970, the S&P 500 provided positive returns in 90% of five-year periods and 95% of 10-year periods.<\/p>\n \u00a0Investors choosing to be in cash<\/strong>\u00a0rather than invest in stocks should know that cash has historically been poor at preserving purchasing power, providing a negative real return after taxes and inflation.\u00a0 According to Goldman Sachs, from 1986 to 2021, cash earned a 3.5% total return, which became 0.8% net of inflation and -0.6% after inflation and taxes.\u00a0 Stocks provided superior returns than cash net of inflation and taxes.<\/p>\n Truth: \u2018Prediction is very difficult, especially if it\u2019s about the future\u2019<\/strong><\/p>\n \u00a0<\/strong>The quote attributed to Niels Bohr, a Nobel laureate in physics and father of the atomic model, provides cautionary advice for investors who think they can successfully time the market. Morningstar\u2019s annual study of 20-year returns provides evidence supporting Bohr\u2019s (and\u00a0baseball sage Yogi Berra\u2019s<\/strong>) cautionary warning about the perils of trying to predict the future.<\/p>\n Investors in the U.S. equity market for the full 20-year period through the end of 2021 earned 9.5% per year, while investors who missed the 10 best days saw their returns drop to 5.3% per year.\u00a0 Investors who missed the 20 best days paid an even steeper price, with returns falling to 2.6% per year.\u00a0 Although avoiding the 10 worst days would boost returns, the best and worst days tend to be clustered together, making it nearly impossible to trade with the perfect foresight to capture the best days while avoiding the worst days.<\/p>\n Truth: Market volatility and risk are not the same thing<\/strong><\/p>\n Many investors confuse volatility and risk.\u00a0 For most investors, short-term market volatility should not matter. Most investors have investment time horizons that should be measured in decades rather than days or months.\u00a0 Permanent loss of capital associated with making bad investments or selling at inopportune times is far more damaging than short-term market volatility.<\/p>\n Most causes of permanent loss of capital are self-inflicted.\u00a0 Failing to maintain enough liquidity to meet unexpected expenses increases the likelihood of having to sell assets at inopportune times.\u00a0 Being overly leveraged also raises the vulnerability of being a forced seller, the unfortunate fate of too many real estate investors in 2008 and 2009.\u00a0 Investors should revisit their investment time horizon and consider accepting more day-to-day portfolio volatility in exchange for higher longer-term return potential.<\/p>\n The bottom line<\/strong><\/p>\n Investors should resist the understandable impulse to try to time the market.\u00a0 Volatility often creates investment opportunities, however, there is a profound difference between making incremental portfolio changes to take advantage of opportunities created by market volatility and \u201call-in\/all-out\u201d strategies to try to call market tops or bottoms.<\/p>\n Those who need to \u201cdo something\u201d in response to volatile markets should recognize the fundamental\u00a0difference between investing and speculating<\/strong>, and only speculate with a small percentage of their overall portfolio.\u00a0 Building wealth over time typically comes from patience and \u201ctime in the market\u201d rather than frenetic trading in response to the latest headlines.<\/p>\n Daniel Kern, CFA\u00ae, CFP\u00ae<\/strong><\/p>\n Managing Director and Chief Investment Officer, TFC Financial Management<\/em><\/p>\n Daniel Kern is the chief investment officer of\u00a0TFC Financial Management. As chief investment officer, he is responsible for overseeing TFC\u2019s investment process, research activities and portfolio strategy. Before joining TFC, Dan was the president and chief investment officer at Advisor Partners, a boutique asset manager in the San Francisco area that managed portfolios for advisers, financial institutions and family offices. He is a contributor to US News & World Report, Retirement Investor.IO and ThinkAdvisor.com and a regular guest on Bloomberg\u2019s Baystate Business.<\/p>\n","protected":false},"excerpt":{"rendered":" With the volatility we\u2019ve seen in today\u2019s bear market, many investors are feeling the urge to time the market. 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