“I don’t want to invest now. The market is at or near its all-time high. I will wait for a better buying opportunity.”
Sound familiar? This appears to be a very logical point of view, but it is not supported by the historical performance of the stock market. The Dimensional Fund Advisors titled “Why a Stock Peak Isn’t a Cliff” shows that the average returns one, three, and five years after a new month-end market high are similar to the average returns over any one, three, or five-year period.
Another problem is that it has been shown repeatedly that trying to time the market is a bad idea.
Take 2020, for example. During 2020, the S&P 500®Index saw a total return of 18.4%. If you were invested during that volatile year, you’d have done pretty well. But if you’d sold when the market dropped, not only would you have locked in your losses, you’d also have potentially missed out on those trading days with the greatest gains, which would’ve meant even bigger losses. For instance, if you’d missed the top 10 trading days of 2020, you’d be down 32.9%.
If you’d missed the top 40 days, you’d be down a whopping 61.8%! (See “Staying power,” below.)
Remaining in the market during both the best and the worst trading days can lead to better returns.
Source: Schwab Center for Financial Research with data from Standard and Poor’s. Return data is annualized based on 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 are used. Returns assume reinvestment of dividends. When out of the market, cash is not invested. Market returns are represented by the S&P 500® Index’s 2020 returns. Indexes are unmanaged, do not incur management fees, costs, or expenses, and cannot be invested indirectly. Past performance is no guarantee of future results.
So, if you have money to invest, we’d encourage you to steadfastly avoid trying to time the market.
How do you know if you have money to invest? This question and many others are answered by your WealthPlan TM prepared as part of The WealthCare Solution TM. Here your own goals, your risk tolerance, and how long you can keep your money invested are integrated so that is more likely that you will be able to reap the reward from time in the market instead of trying to time the market.
To find out how we can help you transform the complexity and confusion surrounding this important topic into your improved WealthConfidence, call us today (321)773-7773 to schedule your free initial consultation with one of our WealthCoaches™. For more information about FirstWave Financial check out our website at www.firstwavefinancial.com