It is not uncommon for us to get the question, “What are you going to do with my investments when the market sells off?” The answer often surprises people, we most likely won’t do anything. If we decide to do something, we will probably be buyers if the market continues selling off. So why even have an advisor if we won’t do anything when the news gets bleak? The simple answer is that we have already done something, we just did it well before any crisis happened.
A good investment strategy always starts with a plan that is catered directly to your goals. Not everyone should have the exact same kind of strategy because everyone’s lives are different. Some need money immediately and some need it decades from now. The timing of an individual’s needs can greatly impact how to invest. Once we understand what you are trying to accomplish, we can build an appropriate asset allocation that balances risk and return. After rigorous stress testing, we can have the confidence that we are giving you the highest probability of success.
Part of the reason we stick to our long-term strategy is because even a small mistake can have big consequences on returns. Check out the chart below, it shows that returns in the S&P 500 over the last 20 years (’96 – ’15) have been a little over 8% annually. This means if you would have invested $10,000 to start with, it would have grown to over $48,000 over that time frame. If you take out just the 10 best return days in the last 20 years, it would reduce your overall return to only 4.49% annually and your $10,000 would only grow to about $24,000 essentially cutting your return in half. That is a massive difference in return and could drastically impact your ability to meet your long-term goals.
What makes these numbers even more interesting is that 6 of the 10 best return days during this period happened within two weeks of the 10 worst return days. This makes market timing even riskier, knowing that the best days are often closely associated with the worst days, and that jumping in and out of the market could cause you to miss the most important returns. Instead of focusing on how to time the market, the data suggests that it is much more important to make sure you have invested appropriately for the long-term and to not risk any guessing in the short-term because the results could be devastating.