Timing the Market (Really?)
Investors will often ask, “what do you think of the market”? What they are really asking or thinking is, “should I get in, or out of the stock market”? For most investors this is very difficult to do successfully, as most who try to correctly move in-and-out of the market are unable to consistently be “right” over long time periods. This is evidenced by some retail investors riding the market all the way down to the lows experienced in 2009 to then consider selling, which would lock in substantial losses. This happened again last year in March of 2020. Compounding this problem, many waited for the market to stabilize before feeling comfortable to “get back in” and missed a huge rally in the financial markets. This trader-like behavior, sometimes referred to as herd mentality, can be very damaging to investment returns.
Market timing behavior by individual investors is well documented. A recent report by Dalbar (a leading financial services market research firm) details that returns for individual investors underperform relative equity benchmarks. The level of underperformance is up for debate (some state on average it may be as high as 8%) but it is clear that on average, timing behavior negatively impacts performance. What can be done to limit or at least mitigate the impact of this herd mentality?
Construct a portfolio that is based on your investment objectives rather than what you or the popular financial media are saying will happen in the financial markets. Switching to a long-term focus of what you want your investments to accomplish can immediately change your perspective. Later in your investment lifecycle when you are at or nearing retirement you may not need a high exposure to equity investments. Remember, approximately 90% of the volatility (otherwise called risk) in your portfolio comes from equity exposure. So, determining how your risk profile is structured will likely have an impact on your level of anxiety if we experience a decline in the market.
So why worry about all of this? High volatility (typically associated with more risky portfolios and investments) has been shown to either make individual investors pull their money out of the markets (market timing) and/or reduce their future contributions to their portfolio. Realizing that we have a natural tendency to loss-aversion and can make emotional investment decisions during extreme market events will help make us better investors.
If you’d like to discuss your portfolio, retirement options, and/or deferred comp, please give us a call. (562) 433-1400