Time in the Market: Why Staying Invested Matters More Than Timing It
A common concern among clients during review meetings is the impact of the current political climate on their investments and whether they should stay in the market. This uncertainty persists even after the election and inauguration. Another frequent question I receive is whether they should “cash out” before a potential market downturn—essentially attempting to "time the market" by selling while the market is strong in hopes of buying back in at lower prices after a correction.
We all know that investing in financial markets offers the potential for wealth accumulation and long-term financial security. To outpace inflation and allow your money to compound into a future amount that can fund your lifestyle and expenses, investing is essential.
It is easy to feel just as anxious watching your portfolio reach all-time highs as it is watching it fluctuate. Even the most seasoned investors experience the urge to "get out now." This feeling is exacerbated by the constant negativity from news outlets and financial publications, which thrive on fearmongering to attract attention. The key is not to fall prey to it. These concerns only intensify as we approach retirement—the point at which we begin relying on our investments for income rather than our jobs.
It has been proven that successful investing hinges on time in the market, rather than attempting to time market movements. Warren Buffet, arguably one of the greatest investors of all time, famously said about time in the market: “The stock market is a device for transferring money from the impatient to the patient.”
Staying invested and resisting the temptation to make fear-based decisions can significantly improve long-term financial outcomes. Consider the following data from Visual Capitalist, which highlights the risks of attempting to time the market:
An investor who remained fully invested in the S&P 500 from January 1, 2003, to December 30, 2022, would have achieved an average annual return of 9.8%, growing a $10,000 investment to $64,844.
Missing just the 10 best days during this period would have reduced the portfolio’s value to $29,708, with an average annual return of 5.6%.
Missing the 20 best days would have further decreased the portfolio's value to $17,826, yielding a 2.9% annual return.
Missing the 60 best days would have resulted in a portfolio value of only $4,205, translating to a negative annual return of -4.2%.
In addition to this data, historical trends show that the market has had more up years than down years. Another one of my favorite Buffett principles is: “Our favorite holding period is forever.” The longer you stay invested, the higher the probability of positive returns for your portfolio:
One-year periods have historically been positive about 73% of the time.
10-year rolling periods are positive about 94% of the time.
20-year periods have always been positive in modern market history.
This long-term growth has occurred regardless of who is in office—Democrat or Republican—and despite global events. If you’re tempted to think “this time is different,” remember that history has repeatedly shown that, despite short-term volatility, recessions, and even major crises, the stock market has maintained a long-term upward trajectory.
Market downturns, whether caused by financial bubbles, geopolitical conflicts, or global pandemics, are inevitable. In fact, the odds of a market downturn in the next two to three years are significant. A market correction can happen at any time, for any reason—or for no reason at all.
Reacting emotionally to negative headlines and attempting to time the market carries significant risks—arguably far greater than staying invested and doing nothing at all.
The key to surviving downturns remains unchanged.
Remember:
Any money you anticipate needing in the next one to three years should be liquid and relatively safe.
If your objective is income, make sure you have income-producing investments like dividend stocks and interest-paying bonds.
If your objective is long-term growth, short-term volatility is an opportunity to buy shares at discounted prices.
Always maintain an emergency fund covering three to six months of expenses.
Avoid expensive consumer debt (high credit card balances).
Plan. Save money. Keep a budget.
It really is that simple!
Abigail Skipper
Financial Advisor & Coach
Comments