Today’s Market Climate
Today’s political landscape is as crazy as we’ve ever seen. With all the drama surrounding President Trump’s first month in office, everyday seems to bring with it more uncertainty about the state of affairs within our nation and abroad. Amidst all of this, one thought that might come to mind is, “this can’t be good for the market.”
Well, the fact of the matter is, 2017 (and the last 3-month period for that matter) has been remarkably strong. While we might see a lot of things going on in the world and interpret such events as highly unstable, the market sometimes responds to a different set of criteria. It could be that investors and institutions see a lot of business stimulus coming in the way of individual and corporate tax cuts (promised by Trump), as well as the Trump Administration’s moves toward deregulation, as a boon to the economy.
Last Friday, U.S. market indices closed in positive territory with the Dow Jones and Nasdaq Composite reaching new highs. For the day, the Dow Jones Industrial Average closed at 20624.05 and is up 4.36% so far YTD. The S&P 500 Index closed at 2351.16 and is up 5.02% so far YTD. The Nasdaq Composite closed at 5838.58 and is up 8.46% YTD. Suffice to say, all three of those indices are off to a blistering start for the year and are currently at or near record levels.
Despite these positive trends in the market, you’ll still get your fair share of opinions and prognostications on turbulence ahead or a “sky is falling” type of prediction. Take them with a grain of salt. Needless to say, no one knows what the future holds.
The Perils of Market Timing
It is tempting at times to take money out of the market during times of perceived instability and reinvest it when things seems “safe.” However, the risks in doing so are extremely high.
Consider this fact. Over the 27-year period from 1989 to 2016, the S&P 500’s average annual return was 9.38%. If you started with a $1,000 investment in 1989 and kept it invested through 2016, you would have enjoyed a 9.38% average annual return on investment and saw your investment grow from $1,000 to $11,510.
Within that time period, there were over 6,500 trading days in the market. But, if you missed the 15 best trading days, your 9.38% return would be 5.67%, and instead of $11,510, it would be $4,494 (from missing only 15 of the best days, out of 6,500 total!). Moreover, if you missed 25 of the best trading days, your annual average return would be only 3.98%, and the value of your investment would be only $2,894.What’s the point here? Obviously, missing those key “best” days would be extremely costly – something you would want to avoid, and can avoid by staying invested in the market.
I showed this chart to a client of mine, who responded with a very astute question. His comment was, “yeah, well what if that same investor were able to avoid the 15 worst days? Conversely, isn’t there value in exiting the market at times so as to avoid such negative days?”
My response to that is a resounding “yes, of course!” As much as we don’t want to miss the best market days, I agree it would be beneficial to avoid the worst market days. However, it still brings us back to the original problem, which is: just when are those glorious up days and precipitous down days?? The truth is, that it’s impossible to know and predict with any real consistency. Trying to do so is simply a guessing game that more often times leads to negative or undesirable outcomes.
The other thing about market timing is that if you’re going to play that game, you have to be right not once, but twice: when to get out and then, when to get back in. Is that something you want to do with your hard-earned money? I don’t think so.
The market can be a volatile place, but it will deliver exceptional return days that you don’t want to miss. When will those exceptional days occur? No one knows – thus, the key is to stay invested and keep yourself from becoming a prisoner of the moment by overreacting to short-term fluctuations. The market is up significantly more than it is down. Thus, it is to your statistical and probabilistic advantage to stay invested and stay the course.
Volatility might rear its head again this year. Amidst all this craziness, that statement should not come as a shock. But, if you have a sound portfolio that is in line with your financial plan, then the best thing you can do when turbulence arises is to not panic and adhere to your investment strategy. So much about being successful in business involves having a disciplined plan and not getting rattled when things go sideways.
Markets are extremely resilient and historically have returned very favorable results to those who stay calm during times of volatility. Doing so, in the long-term, you’ll be rewarded for your discipline.