Needlepoint wisdom is full of contradictions. Some caution, “You have to wait until the time is just right,” while others say, “There’s never a better time than now.” Both sayings are good advice—depending on the situation, but in the realm of investments, I have to go with the latter.
Many investors and advisors set aside cash for “tactical allocations,” and that sounds very impressive—like Seal Team 6 is pulling security for your portfolio to ensure its success, but I assure you that’s not the case. In fact, you are way more likely to miss out on stock market rallies if you are just sitting on the sidelines waiting for the perfect time.
In Burton Malkiel’s classic A Random Walk Down Wall Street, he writes, “An investor who frequently carries a large cash position to avoid periods of market decline is very likely to be out of the market during some periods where it rallies smartly.” And to prove his point, Malkeil discusses two different studies.
In the first, Professor H. Negat Seybun of the University of Michigan found that 95% of gains over a 30 year period came from just 90 of about 7,500 trading days—that’s just over 1% of trading days. So if you are trying to time the market, that’s a pretty narrow margin for error. If you were not invested during those specific 90 days, you essentially missed out on 30 years of growth.
Second, Malkiel cites a study by Laszlo Birinyi in his book Master Trader. The study showed that $1 invested in the Dow in 1900 would be worth $290 in 2013. But, if that investor missed the five best trading days each year, that same $1 would be worth less than a penny over the same timeframe.
In other words, trying to time the market can be devastating to long-term portfolio growth. You think you’re exercising patience, but you’re only eliminating opportunities for growth.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.