Here's Why You Shouldn't Try and Time the Market
History has proven that timing the market could cost you some hefty returns, according to Bloomberg.
In 2020 alone, we have seen the Dow lose almost 3,000 points in one day, and the S&P 500 rally 9 percent in one day. The stock market this year has been a rollercoaster for traders and investors alike. Now, on the back end of 2020, the S&P 500 has almost broken even year-to-date. Volatility has brought massive gains to some active managers, but the downside of missing out is much greater.
This statement is backed by the top 5 sessions in 2020 and what would have happened if you missed out. Without the best 5 single-day gains, 2020 returns would be at a loss of 30 percent. Timing the market is risky but tempting. According to a recent survey conducted by Citigroup, more than two-thirds of investors expect the market to drop 20 percent.
“We want to be tactical,” Yana Barton, a fund manager at Eaton Vance Management, said in an interview. “But the problem is, it’s easy to get out and you don’t know when to get back in.” Several hedge funds have lagged the overall market because of their bearish attitude. Legendary investor Stan Druckenmiller recently stated that he had made “all of 3% in the 40% rally.” Broadly, hedge funds that focus on equities were down 6.3% in the first half, according to data from Hedge Fund Research. That compared with a total decline of 3.1% in the S&P 500.
However, expecting a sell-off in the near future isn't unreasonable, especially after the S&P 500 railed 40 percent from its bottom in March. Quarter 2 profits are estimated to have fallen 44 percent, billions of dollars in buybacks and dividends have been retained, and stay-at-home orders might be enforced again. The Federal Reserve undying support for the economy has held the market together.
“If you look back, they are unexpected. We get some of the biggest rallies on those unexpected days and so if you’re timing the market and you’re out of them, you’ve missed out on all of the rally really,” said Chris Gaffney, president of world markets at TIAA Bank. Getting out when you're up big may be smart, but how do you know your returns won't continue to grow?
Over the past century, the S&P 500 has experience 13 bear markets prior to 2020, and all of them have seen these pullbacks recover and exceed the previous peak. “People are always hopeful that they can time the market, and most people try and time the market based on emotion rather than logic,” said Olivia Engel, chief investment officer of State Street Global Advisors’s active quantitative equity team. “From a couple of decades of investing, I would say that timing the market is just really hard and if it was easy, we’d all be very rich.”
Bearish investors haven't given up hope, claiming that the S&P 500 will revisit its March low. However, during the eight market cycles since World War II, the S&P 500 has only come within 5 percent of its bottom once.
“You can’t buy it one day and sell it the next and think you can outfox the market. You can’t do that,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas. “The way you make money in the market is you buy good companies and you hold on.”