Time in, or Timing investments
In an article written by our very own Clay Reynolds, he sets up this discussion really well. I’d recommend reading it before diving further into this discussion - Time in the Market vs. Timing the Market (whitakerwealth.com).
The age-old question of, “Can I beat the market by buying in low and selling high?” Ideally, we all want the ability to do so, and more importantly, we want to maximize these opportunities as they arise. However, think it through. The average investor is not nearly in the weeds enough to identify each of these opportunities. The reality is that when the news reaches the media, the maximum chance has already passed. If the average investor can’t time the market well, how do I maximize my returns?
Maximizing returns
Maximizing an investor’s returns is a function of how much risk they are willing to take. This is referred to as utility in finance. It is essential to align your utility with your strategic goals. Our team at Whitaker-Myers Wealth Managers can guide you toward this alignment. Remember, the investor’s risk tolerance, risk aversion, capability and capacity, and behavioral responses all aggregate to determine their risk score. Utilizing this score is an excellent methodology to align your comfort level with your strategies.
When maximizing returns outside the abovementioned factors, we recommend staying invested in the market. Thus, with more time in, the market vastly exceeds the outcome of trying to time investments.
Let’s take a look at some data
The effect of missing the best market return days:
The graph above shows the impact of missing the best market days over the past 25 years. As you can see, missing the best ten days in this timeframe resulted in an annualized 3.31% underperformance compared to staying invested. This graph also highlights the importance of compound interest. The 3.31% annualized compounds to nearly $330,000! Continuing down the list, missing the best 50 total return days decreased the portfolio's value by 42%! Compound interest, asset class selection, and staying invested are key drivers of this success strategy.
Stay invested, even in downturns
It’s difficult, no question. When the market dives, as we saw in 2008 or during COVID-19, our initial reaction is to sell and save as much as possible before losing it all. Inherently, we want to solve and save. However, isn’t this the right time to buy? The adage of buy low, sell high? Our intuition can sometimes be the biggest detractor of our financial success. Thus, aligning the investor's risk score with their strategies is important.
I always recommend having an expert with you on this journey. Our team at Whitaker-Myers Wealth Managers is not only capable, but we want to walk with you on your journey—schedule time with one of our advisors to get you on your way.