With markets recently making all-time highs, we felt it was probably a good idea to revisit what in most instances represents the most significant pitfall to investors and to a working financial plan.
And what is that pitfall? What is the single biggest buster of momentum for most individuals? It is none other than that well-ingrained human desire to try to in-and-out the market. That’s right: Market Timing. While it may be painful to bring the previous bear market of 2007 – 2009 back into focus, it is worth discussing in light of the recent highs as such major market pullbacks usually represent the largest fear of nearly all of us, regardless of which stage of life we are in. And those significant fears become much more visceral as markets continue to push higher, especially a long way into a healthy bull market cycle such as we’ve experienced since the previous downturn.
It is only human to experience this very natural “fear of heights”. But the feelings that the human brain automatically triggers most often lead investors to do the wrong things at the very wrong times. While “going to cash” with all or a portion of ones nest egg may feel good (at least for a while and probably not if you miss out on further gains…), studies have shown that individual investors are horrible at timing an exit correctly. And then there’s the other problem of having to reinvest your assets at some point, ideally at a lower value. This also nearly never happens. Interestingly enough, one of the main reasons that market timing is so difficult to execute (even for professionals) is that the very best single days to invest often occur right before or right after the very worst days. In fact, eight of the ten best days in the last five years actually occurred in 2008 while we were in a larger bear market cycle!
The single biggest detriment to long-term investment performance and also, therefore, to an individual’s financial picture and retirement is moving a large chunk of invested assets to cash at the wrong time. There have been many studies done on this subject. So the point here is that attempting to capture only the upside while missing those big down days is an unrealistic expectation.
For long-term investors, diversification and time in the market are what count, not timing the market. In-and-outing the stock market is a fool’s errand that even the best professionals cannot do consistently and is often the Ultimate Momentum Buster for investors who are working to grow their assets for the future or to support their current retirement.
The point of this discussion is just to serve as a reminder. As much as we are in the business of helping our clients grow their assets to live better lives, we are also in the business of helping them manage the risks in doing so. If any of our clients ever begin to feel so fearful regarding the market that it is a problem, we highly suggest that they contact us to set a time to review things with their advisor. Spending some time talking with your advisor about your concerns, having a serious discussion about risks and how your investments fit into the bigger picture is The Ultimate Momentum Builder and Sustainer. We feel this is prudent advice in the current investment environment and hope everyone takes it to heart.