Timing vs Time In the Market

Yup, we’ve officially hit the highest overnight funding rate in 16 years here in Canada. Our southern neighbours share a very similar story. Combine this with the geopolitical uncertainty occurring across the globe at the moment. We are in RISK OFF mode.

This has created a lot of fear and uncertainty in the market. These two emotions are the perfect kindling for the panic bonfire. It appears that nothing is spared from the sell-off we have experienced in recent weeks and months. Just take a look at the fear and greed index. At the time of writing, it is at a 24. At the depths of the pandemic, it was at a 6.

ULTIMATE FEAR

What industry loves to profit off fear? …. yes, you guessed it, the media! Every business channel has plastered phrases like the following across their tickers and headlines.

👉 Global recession 📉

👉 Bear market 📉

👉 Stock market crash 📉

👉 Interest rates rising 📈

👉 Inflation is soaring 📈

👉 The impending housing market implosion 📉

I’m not saying there isn’t some truth to these headlines but they often publicize the problem and offer little to no actionable steps or solutions. Fear sells.

I’m going to drop some knowledge bombs on you and allow you to stay somewhat calm and trust the data.

During these uncertain times, I often get questions like

1. Should I sell everything now and wait until the bottom and get back in? In theory, yes, but good luck trying to time the market (see below)

2. Why don’t I just wait until the market has hit rock bottom and then drop a lump sum into it? Haha, do you have a crystal ball, and were you able to time the following tops/ bottoms in the stock market? Nope, I didn’t think so.

Recent Bottoms:

S&P 500 bottomed Oct. 9, 2002, following a 2.5-year bear market

S&P 500 bottomed March 9, 2009, after declining 57%

S&P 500 bottomed March 23, 2020 after declining 35%

Recent Tops: 

S&P 500 topped March 31, 2000

S&P 500 topped Oct 12 2007

S&P 500 topped Feb 14, 2020

S&P 500 topped Nov 26 2021

3. What’s the point of dollar cost averaging if I know stocks are going to go down?

Let me show you what the data illustrates on why historical people who have had more time in the market have returned better performance than people who have tried to time the market

Don’t Miss The Best Days Part 1

Fidelity highlights the importance (using a $10 000) of keeping invested throughout a 40-year period. It clearly illustrates that if you invested $10 000 in 1980 and kept that amount (you did not sell), in March 2020 you would have $697 421.

Conversely, if you missed the best 5 days, you would only have $432 411 ( $265 010 difference).

If you missed the best 50 days, you would only have $48 434 ($648 987 difference).

Take-home point: Keep invested, don’t try to time the market

Don’t Miss the Best Days Part 2

Bloomberg produced a similar graphic. The timeframe is from 2001-2020 and instead looks at percentage gains vs absolute dollar amounts.

It clearly illustrates that if you invested you held the S & P 500 in 2001 and held it, (you did not sell), in March 2020 you would have returned an average of +7.5%

Conversely, if you missed the best 10 days, you would only have returned +3.4%

If you missed the best 30 days, you would have actually returned an average of -1.5%

AND if you missed the best 40 days, you would have returned an average of -3.4%

Take-home point: Keep invested, don’t try to time the market

Don’t Miss the Best Days Part 3

Edward Jones sums it up nicely and packages the above charts into one.

Take a look at what a $10 000 investment in 1998 in the MSCI (Morgan Stanley Capital International) Canada would yield in both dollar and percentage amounts if you excluded the best 10/20/30/40 and 50 days.

Take home point: Keep invested, don’t try to time the market

The longer you invest, the lower risk of you losing money

Forbes backtested about 93 years of stock market data and compares the risk of losing money over the time horizon of investing. As the chart depicts, the likelihood of losing money reduces significantly the longer the investment horizon. For example over a 15 year time frame you have a 0.2% of losing (negative return) money. Said differently, you have a 99.8% of having a positive return (making money) over 15 years.

Take home point: Keep invested, don’t try to time the market

Even Bad Timing Trumps Inertia

Given the difficulty of timing the market, the most realistic strategy for the majority of investors would be to invest in stocks immediately.

Procrastination can be worse than bad timing. Long term, it's almost always better to invest in stocks—even at the worst time each year—than not to invest at all.

Dollar-cost averaging is a good plan if you're prone to regret after a large investment has a short-term drop, or if you like the discipline of investing small amounts as you earn them.

Time in the market beats market timing because it's like the tortoise winning the race - slow and steady. Here's why it tends to be superior:

1. Less Stress: Market timing can be a rollercoaster of emotions, but time in the market lets you chill. You're in it for the long haul, so you don't sweat the small ups and downs.

2. Money Magic: Time is your investment's best friend. The longer you're in, the more your money multiplies through the magic of compounding. It's like planting a money tree.

3. Save Cash: Frequent buying and selling can be expensive. With a long-term strategy, you save on transaction costs and taxes. More money for you!

4. Happy Investing: Market timing can be stressful, but a long-term approach lets you enjoy life without constantly checking stock prices. It's a happier, more relaxed way to invest.

So, embrace the slow and steady approach, and watch your money grow over time. It's like planting the seeds for a financial garden that'll bloom beautifully in the future. 🌱💰😊