Why market timing and time in the market are both practiced by most investors. Given the coronavirus pandemic threat why it is okay to reduce stock exposure.
Topics covered include:
- What would a stock portfolio return that misses the best or worst days and how likely is that.
- How do rolling 30-year stock returns differ depending on the starting point.
- Why are stocks likely to outperform bonds over the next 30 years.
- What is sequence of return risk.
- What is market timing.
- Why long-term investors should never move completely out of the stock market, but it is still okay to adjust stock exposure based on market conditions.
- What are some additional rules of thumb for market timing.
- How the coronavirus pandemic has increased financial and economic risks and what to do about it.
Show Notes
What Happens When You Miss the Best Days in the Stock Market? by Michael Aloi—The Motley Fool
Guide to Retirement 2020— J.P. Morgan Asset Management
Deconstructing 30 Year Stock Market Returns by Ben Carlson—A Wealth of Common Sense
Stock Market Charts You Never Saw by Edward F. McQuarrie
Market Timing By Troy Segal—Investopedia
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Learn More About Market Timing and Pandemics’ Effects on Markets
Predicting The Economy and the Stock Market—Can It Be Done?
How To Reenter the Stock Market
Rebalancing, Overvaluation, Market Timing, and Stock Splits
Coronavirus and the Financial Impact of Pandemics
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 289. It’s titled, “Market Timing Versus Time in the Market.”
What if you missed the best days in the market?
Yesterday, I reduced the stock allocation in the Money for the Rest of Us, Plus model portfolios by 10 percentage points, at least for the most aggressive models. Shortly after sending out that notice, I received an email from a member who wrote, “Aside from all the craziness in the world right now, I stumbled upon an article that really shocked me.” Turns out it was just one of many articles basically stating the same thing.
The article was titled, “What Happens When You Miss the Best Days in the Stock Market?” The member continued, “Basically I’m asking if you think it’s true and that the math checks out, or is there some kind of catch where it’s not showing all the pieces of the puzzle.”
This article was written by Michael Aloi. It was published on the Motley Fool website. And he referenced a study by J.P. Morgan Asset Management that is included in the very well-done J.P. Morgan Guide to Retirement, their 2020 edition. On pg. 43 of the guide, it shows the impact of being out of the market for the best 10 days, 20 days, 30, 40, 50, 60 days and so on. This is for the S&P 500, the time frame January 3rd, 2000–December 21st, 2019. So a 20-year time frame.
Over that period, if you were fully invested, your return would have been 6.06%, annualized. But had you missed the best 10 days, your returns would have fallen to 2.4%, annualized. And the amount of money you would have made investing, $10,000 at the beginning at that period, would have been cut in half. Had you missed the best 60 days, your return would have been -7%, annualized. You would have lost money, having missed those best 60 days.
Now, this is a very commonly quoted study to say “market timing, you shouldn’t do, at all.” But is it really that simple? That’s what we’re going to consider in this episode.
How hard would it be to miss the market’s best days?
Now studies like these show well, you shouldn’t market time, it’s time in the market that makes the difference. But let’s consider this study. How difficult would it be to be out of the market on the best 10–60 days, but in the rest of the time. Your timing would have to be impeccably bad, but the odds of that are infinitesimally small
Over a 20 year period, there’s 5,000 market days. One day is only .02% of the entire time frame. And so if you could actually pick 10 days, with the odds of getting it right at the worst day, or the best day for that matter, is .02%. The odds of picking the 10 best or the 10 worst would be infinitesimally small.
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