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The Cost of Market Timing
Market timing is the act of moving in and out of the market or switching between asset classes based on predictions of
future price movements. Investors who do it, rely on technical indicators or economic data to make those predictions. However, time and again, studies show that
it is extremely difficult to predict the future direction of the stock market, and investors who try, tend to underperform investors who remain invested.
While market timing is not impossible to do, few investors have been able to predict market shifts with such consistency that they gain any significant advantage over the buy-and-hold crowd.
Take a look at the most recent data to bear this out. The chart below highlights the annual return of the market, represented by the S&P 500 index, from 1997-2016. Over that 20 year period, a buy and hold investor would have achieved a 7.70% return, not bad considering that includes the dot-com bust and the financial crisis also known as The Great Recession. However, if an investor got nervous during that time ---- and who didn't ---- they might have sold their stocks and potentially missed out on the market's best 10, 20, 30 or 40 best days, in which case their long term performance was punished, severely.
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Source: Schwab Center for Financial Research with data provided by Standard and Poor's. Return data is annualized based on an average of 252 trading days within a calendar year. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. Top days are defined as best-performing days of the S&P 500 during the 20-year period. Indexes are unmanaged and do not incur fees or expenses and cannot be invested in directly. Past performance is no guarantee of future results.
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What are investors giving up by trying to time the market?
Opportunity Costs: missing out on upside performance as shown in the chart above, can really hurt.
Transaction Costs: investors who move in and out of funds underperform the indices by as much as 3% due to transaction costs, especially when investing in funds with expense ratios greater than 1%.
Taxation Costs: investors who are able to buy low and sell high may penalized in the form of short term capital gains taxes.
As this bull market wears on and equity markets repeatedly reach and then surpass their all-time highs, investors may be tempted to think we're due for a correction (and we might agree!). However, we know predicting the timing of a downturn is futile. Instead, the best way to position yourself for that inevitable correction is to take steps to truly diversify your portfolio and maintain the right mix of equities, fixed income, real assets and non-traditional investments given your individual situation. Because for most investors, the real costs of lost time and opportunity are almost always greater than the potential benefit of shifting in and out of the market.
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The major equity benchmarks ended last week mixed. Trading activity was light as investors appeared unmoved by domestic and international political developments such as Former FBI Director Comey's Senate testimony and the surprise UK election results. While the smaller cap indexes gained and the Nasdaq composite fell, small-caps continue to lag substantially year to date. Much of the market's gains so far in 2017 have been concentrated in the giant, technology-related shares; a function of leading firms seizing market share in a slowly growing economy.
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> Federal Funds Rate: The Fed concluded its fourth of eight Federal Open Market Committee (FOMC) meetings of the year today with Chair, Janet Yellen, announcing a
0.25% rate hike. This action did not come as a surprise; as of Friday, June 9, the fed funds market was pricing in a 96% chance that the Fed would hike rates by 0.25% at this week's meeting. Of the economists surveyed by Bloomberg, 73 out of 78 believed a rate hike was in store.
The fed funds rate is now between 1.00 - 1.25%.
The 3-month Treasury yield, which is more directly impacted by Fed moves, has moved higher since the last rate hike in March 2017, indicating that the bond market believed the Fed would hike again in June. However, the 2-year Treasury yield has stalled. This may indicate that markets don't believe that there is much economic benefit (in the form of inflation control) to be gained by increasing rates further, but given that the 2-year Treasury yield is flat relative to March, it also may indicate that markets don't believe the rate hike poses huge downside risks to economic growth over that time horizon either.
> Global Equities: Overseas earnings were even better than expected during the first quarter of 2017. Global equity analysts were looking for strong earnings growth from overseas companies after years of flat to declining earnings; for the most part, those markets delivered. These strong earnings, combined with economic and other factors, have led to the major international indexes outperforming the S&P 500 year to date.
> US Equities: Last month, US stocks added to an already strong year, as the S&P 500 gained 1.4% for the month, bringing the year-to-date return for the index (through May 31) to 8.7%. Earnings remained a key driver as results in May followed the same positive trends as those in April.
And, markets impressively remained resilient in the face of both an increasingly challenging path to fiscal policy initiatives in Washington, D.C., and of heightened geopolitical tensions (i.e. North Korean tensions, a global cyber attack and a terrorist attack in the UK).
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"Dad jokes" are in and of themselves an art form. The first rule is that they have to be bad. They can't be too crass or "adult." They have to also be the sort of thing that you should've seen coming, but somehow didn't. And they're all a little embarrassing to laugh at, but you still do. So in honor of Father's Day this Sunday and all the Dad's out there, a few Dad jokes to make you smile:
Why did the scarecrow win an award?
Because he was outstanding in his field.
Where do you learn to make ice cream?
Sunday school.
How many apples grow on a tree?
All of them.
What do you call somebody with no body, and no nose?
Nobody knows.
Dad, can you put on my shoes?
I don't think they'll fit me.
"I'll call you later."
Don't call me later, call me Dad.
Why can't you hear the pterodactyl go to the bathroom?
Because the pee is silent.
What is Forrest Gump's password?
1forrest1
The shovel was a ground-breaking invention.
Dad, did you get a haircut?
No, I got them all cut.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we provide institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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