Why you should avoid market timing

Written by: Ryan Bouchey

 
With the recent volatility around the globe and particularly in the US stock market, investors have the tendency to make dramatic changes to their portfolios to avoid any losses. With geopolitical uncertainty, an unclear picture of what the Fed may do next and the fear of a potential market correction – should an investor ever make a move to cash to avoid a sharp downward turn in the market? Our answer is a resounding NO!

 
While at times we do use cash as an asset class in our five actively managed risk based portfolios, we never move dramatically from an investment in ETF’s to an investment in cash. A great article and study on this topic by Hulbert Financial Digest was recently published in the Wall Street Journal. The study tracked and benchmarked the returns of 81 advisors who are considered stock market timers. Their annualized return since March of 2000 was a 0.8% annualized LOSS. The Wilshire 5000 Total Market Index, which measures the performance of most publicly traded US companies, had an annualized gain over this time of 4.2%. The problem not only lies with timing the market downfalls properly, but more importantly when to get back into the market when you are sitting in cash.

 
Let’s take the beginning of 2014 as an example. Between January 22nd and February 3rd 2014 the S&P 500 Index quickly fell by over 5.5%. Many pointed to poor economic data and fear about the Fed’s tapering of its bond buying program. If you thought this was the market correction the headlines were all predicting, which is a greater than 10% drop in the market, you may have liquidated your investments and went to all cash to avoid losses. By doing so, you would have missed out on the greater than 14% gains the S&P has experienced since February 3rd. You may also still be in cash waiting for the predicted market correction which no one can accurately predict.

 
The last market correction was back in October 2011. While it wouldn’t be out of the question to experience another correction in the near future, it’s also impossible to predict. The best recommendation during these volatile times would be to continue to stay disciplined, have a well-diversified portfolio, stick to your long-term investment principles and never try to time the stock market.