Today we're talking about one of the most tempting and dangerous moves investors can make: timing the market. It feels intuitive, right? Get out when things look bad, get back in when they look better. But history tells us that this strategy is more likely to hurt you than to help you. Now let me start by saying, past performance is no guarantee of future results. But in times of volatility, we can lean on history to bring in some perspective.
Let's start with a simple example. According to a study done by Dimension Fund Advisors, if you had invested $1,000 in the S&P 500 back in 1990 and just left it alone with no trading and no market timing, you would have over $34,000 by 2024. Now let's say you missed just the single best day in the market during that 34-year period. Just one day. That $34,000 would become about $30,000. Now, if you had missed the five best days in the market during that period, your investment would only be worth about $12,000. That's a $22,000 difference just for missing the five best trading days out of over 8,500 days in the market.
And here's the kicker: the best days often happen during the worst times. For example, I think we can all remember back to 2020, during the height of the pandemic panic, the S&P 500 had some of its worst days and best days ever, all within just a few weeks. A study done by JP Morgan said that seven of the market’s ten best days have occurred within two weeks of the 10 worst days. So, trying to avoid pain can often mean you might miss the recovery as well.
So, let's talk about those recoveries. What happens when the market drops, say, 20% or more? Dimensional Fund Advisors released a study outlining what markets historically do following a downturn. And on average, the S&P 500 has returned 22% in the 12 months following a 20% downturn. Over the next three years, it delivered an average cumulative return of over 40%.
And sure, headlines will always give you a reason to be nervous – wars, elections, interest rates, inflation, recessions, and so on. But the market has weathered all of it. The long-term trend has always been upward, rewarding those who have stayed patient.
So, I know I just threw a lot at you. What can you do instead of guessing when to get in or when out of the market? Stick to a diversified investment plan. Keep contributing regularly. And remember, volatility is the cost of admission for long-term growth.
Sometimes, during a downturn, can be one of the best times to contribute more. Or, if unable to contribute, maybe shifting dollars in your portfolio to equities. Now, in doing that, you want to be sure not to exceed your risk tolerance- and rebalance your portfolio regularly to ensure it's in line with your stated investment objectives.
The real danger isn't the market dip—it's making a short-term decision that permanently changes your long-term investment outcome.
So, if you have questions about your investment portfolio, or just need to talk through the market environment during times of volatility, our team here at Syverson Strege is happy to help. Please give us a call at 515-225-6000.
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