The Standard & Poor’s 500 Stock Index (S&P 500) dropped over 30% by March 22nd from its closing price at the end of 2019, a period of about 80 days. It was a swift decline that, for many, went unnoticed until they looked at their first quarter investment statement. The first reaction is typically to be upset and you figure it will continue to drop further, so you just sell everything at a market low attempting to avoid further losses.
From the bottom on March 22nd until the first day of September, the S&P 500 gained 60% and compared to the end of 2019, which was a historical and totally unexpected increase by many investment professionals. For the year, it was up almost 11%. If you skipped looking at your first quarter investment statement and pulled up your holdings on September 1st, you would have been happy with the 11% gain. Then you thought about the upcoming election and the potential change in administration which you feel may have a negative impact on the stock market. So, you decide to sell everything to protect your 11% gain.
The day before the election, the S&P 500 was down just 4% since September 1st and the day of the election, it was back to about where it closed on September 1st. Since election day, through the close on December 7th, the S&P 500 gained another 5%, and a total gain of over 14% since the end of 2019. So, you get upset that you had missed the gain and buy back into the market which was at a historic high.
Trying to time the market or making emotional investment decisions are almost always a bad idea. The problem with trying to time the market is when exactly do you get out and when exactly do you get back in? Including professional money managers, no one is smart enough to consistently know when to buy and when to sell. Making emotional decisions are even worse than market timing because it has no basis in proper market analysis. You just get this feeling and you either go all in or get completely out.
The other danger with timing or emotional investment decision making is that you might get lucky once and think you can repeat that success all the time. Luck is not an investment strategy. You cannot predict the future, but you can see how the market behaves over long periods of time. History tends to repeat itself, with some variations, and the longer the time-period you look at, the more times the market is positive, and in many cases, outperforms most other asset classes over the same time-period.
When managing your investment portfolio, you should be focused on the long-term. This would exclude your emergency fund and short-term cash needs. It does not matter whether you are in the accumulation phase or preservation phase of your investment timeline, investment decisions should be made based on years, not days, weeks, or months. This long-term focus takes discipline and if followed, can significantly reduce, or even eliminate the desire to time the market or make and emotional investment decisions, likely resulting in better long-term investment performance.
As I have said and written many times, it is critical to have a personal Investment Policy Statement (IPS) to help guide your long-term investment decisions. It will help you establish an appropriate level of risk (volatility), identify your target rate of return, and create a disciplined process to rebalance your portfolio within an acceptable range of variance. An IPS will keep you in the market when you should be in the market and provide enough flexibility to better protect your portfolio in more difficult markets.