Every time financial markets sink someone asks: When is this going to end? Should I sell now, before it gets even worse?
Rationally, we know that the current period of plunging markets, high inflation, and general uncertainty around the economy will resolve, and things will get better, eventually. But that does little to soothe the raw nerves that are keeping you up at night.
In reaction to market gyrations, many investors want to do something to avoid losses.
Kayla Sabbagh, an analyst at Wealthstream Advisors, says those natural instincts can often lead us astray. In a new report, she recommends “focusing on what can be controlled (i.e., limiting taxes, rebalancing and selecting low-cost investment vehicles),” and although it is difficult to do: “Try not to make long-term investment decisions based on short-term market conditions.”
Perhaps you are thinking that someone out there knows when to get in and when to get out of a particular asset class. But research has shown that it is a fool’s errand to attempt to time the market, because it requires two lucky decisions: when to sell and when to buy back in.
Sabbagh underscores the point, noting that “the market rewards investors who are able to maintain a long-term perspective and stay the course through turbulent times.”
To put some numbers to that notion of staying the course, she highlights data from 1990-2021 for the S&P 500 index. During that period, the index had an annualized compound return of 10.76%. But if you got freaked out and pulled out, you didn’t enjoy the rallies that propelled the index higher along the way. “Missing only a few days of strong returns can drastically impact overall performance.”
The numbers are clear. If you missed the 15 best single days, your return drops from 10.78% to 7.15% – and if you miss the 25 best single days, your performance is practically cut in half, to 5.55%.
Sabbagh warns against trying “to outguess the market,” because as she notes, there are hundreds of mutual fund managers who attempt to do just that, only to face failure. According to research from S&P Global, among domestic stock funds, “90% have underperformed on the S&P Composite 1500 over the past 20 years.”
If you can’t time the market, what should you do? Try not to obsess over every day’s price movements and instead, do these three things:
Step 1: Remind yourself why you are investing. Most of us are saving for a long-term goal, like retirement or college, which is likely years or decades in the future. Even if you were retiring within the next couple of years, your account needs to last another 20-30 years. If you are contributing money into a retirement or college savings vehicle, put your head down and stick to your plan.
Step 2: Determine whether you need cash within the next 12 months. If so, that money should never have been at risk at all, so sell whatever you need and keep the proceeds in a safe savings, checking, money market or short-term certificate of deposit.
Step 3: Find free money. Determine how much you are paying in fees and see if you can reduce them by replacing an actively managed fund with a low fee index mutual fund. Or consider an automatic investment platform instead of an investment “professional” who is managing money, rather than providing important financial planning to you and your family. Make sure that anyone with whom you work adheres to the fiduciary standard, meaning they are required to act in your best interest, at all times.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.
