The Market - Sell Out or Stay Put?
0708In recent weeks, the financial markets have shown great volatility (mostly in the downward direction) beginning with the so-called Brexit vote occurring across the pond. Naturally, this has some investors wanting to know whether it would be best to take their lumps, sell out of the market and go to something "safe".
If you've been wondering the same thing, I'd like to share a perspective with you, as additional food for thought.
Before I do, let me say this; the answer to this question, of course, will be different for each person and situation, and it must be something you can live with. That said, consider this hypothetical situation:
Two people invest $100,000 each into identical portfolios on January 1, 1973, and were able to successfully reproduce the returns of the S&P 500. An abysmal market environment during 1973 and 1974 (sound familiar?) had this impact on their portfolios:
3 Months Later…. $95,120
6 Months Later…. $89,631
9 Months Later…. $93,951
12 Months Later…. $85,345
21 Months Later…. $57,378
What if at this point, Investor #1 gave up and "threw in the towel"? See how the results would look if #1 liquidated the portfolio and invested the remaining $57,378 in a CD earning 5% (seen one of those lately?):
6 Months Later….$58,813
12 Months Later…$60,247
2 Years Later…$63,259
5 Years Later…$73,230
10 Years Later…$93,462
Investor #2, however, remained committed to the original investment strategy and continued to mimic the returns of the S&P500 with the remaining $57,378?
6 Months Later…$77,157
12 Months Later…$79,262
2 Years Later…$103,404
5 Years Later…$124,768
10 Years Later…$244,437
This example shows just how damaging bailing out when things get tough might be.
Frankly, timing the market is nearly impossible. This is an important point to remember. A study by the Schwab Center for Investment Research makes this case very clearly.
In the study, five hypothetical long-term investors were looked at. Each was given $2,000 to invest at the beginning of every year for the 20 years ending in 2012 and left the money in the market, as represented by the S&P 500® Index.
Incredibly, the study showed that the investment results for even bad market timing trumped doing nothing at all and just staying in cash investments. The five hypotheticals and their results after 20 years were:
Perfect Timing...$87,004
Invested Immediately…$81,650
Dollar Cost Averaging…$79,510
Bad Timing…$72,487
Stay in Cash Investments…$51,291
Of course, we all would love to have perfect timing, but the chances of that are about as good as winning Powerball. But look at the relatively small difference between the "perfect timing" amount and the amount when the funds were "invested immediately" upon receipt without any thought as to timing whatsoever!
Further, the study looked at 68 different 20-year intervals and found similar results in almost every case.
And consider what happens when recovery from a bear market does ultimately occur. According to another study by the Schwab Center for Investment Research, of the 16 bear markets from January 1926 through June 2011, in the 12 months following the end of a bear market, a fully invested portfolio returned an average of 46%. However, if the first six months of the recovery was missed because the investor was holding cash, the average return was only 11%.
Am I suggesting that everyone should hold on tight and not get out? By all means no. It's a decision only you can make, and you have to be able to sleep at night.
But before you leap, be sure you have all the facts and have considered all the possible consequences.
