It’s understandable if the economic uncertainty unfolding in the daily news has left you wondering – or worrying – about what’s coming next. No matter how you feel about the your own portfolio, it’s hard to deny that the prospect is currently causing considerable market turmoil.
Regardless of how the coming weeks and months unfold, are you okay with gritting your teeth, and keeping your carefully structured portfolio on track as planned? This probably doesn’t surprise you, but that’s exactly what I recommend. (Unless, of course, new or different personal circumstances warrant revisiting your investments for reasons that have nothing to do with all the Covid-19.
There are days whereby you may feel like you’re in Bizarro land and everything that you knew to be true no longer holds true but I want to reassure you that we’ve been here before. Market down turns and recessions aren’t new even though it may seem that way.
That being said, the news is admittedly unsettling. If you’ve got your doubts, you may be wondering whether you should somehow shift your investments to higher ground or lower-risk investments, until the coast seems clear. In other words, might these stressful times justify a measure of market-timing?
Here are four important reminders on the dangers of trying to time the market – at any time. It may offer brief relief, but market-timing ultimately runs completely counter to your best strategies for building durable, long-term generational wealth.
1. Market-Timing Is Undependable. Granted, it’s almost certainly only a matter of time before we experience another long-term recession. Market history has shown us time and again that seemingly sure bets often end up being losing ones. Even as recently as year-end 2018, when markets dropped almost overnight, many investors wondered whether to expect nothing but trouble in 2019. As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall. Had you gotten out then, you might still be sitting on the sidelines, wondering when to get back in. The same could be said for any market-timing trades you might be tempted to take today. Please keep this in mind as you determine the next steps for your portfolio.
2. Market-Timing Odds Are Against You. Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns and this can have some long-term detrimental effects on your portfolio.
3. Market-Timing Is Expensive. Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous and can thus make some of your market-timed trades moot.
4. Market-Timing Is Guided by Instinct Over Evidence. Your brain excels at responding instantly – instinctively – to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve. Stay off the emotional roller-coaster. Revisit your risk tolerance and your investment roadmap to reassure yourself of not only the progress you’ve made so far but as a reminder of your long-term goals.
One of my most important jobs as an Advice-only Financial Advisor is to help my clients avoid just these sorts of market-timing perils – during just these sorts of tempting times. That being said, even if you do everything “right” in theory, I still cannot guarantee your success. But I am confident that sticking with your existing plans represents your best odds in an uncertain world.
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