Market Timing – Why We Never Go To Cash

The stock market has been volatile to say the least in 2020.  Every time we see market volatility like this, investors are tempted to time the market.  They do this by making short-term changes to their risk tolerance,  selling some or all of their stocks and waiting until the market is lower to buy back in, or trying to find the “best” time to add more money to their portfolio.

A couple months ago, I had a conversation with one of our clients. The market had been dropping like a lead balloon over the previous few days and this client admitted that he was nervous. He felt a bit better after our discussion, but he ended our call by saying: “If things get ugly, it is okay with me if you want to go to cash.” I know that most investors want to hear that we will go to cash (e.g. sell everything) if the market starts to tank. Here’s the bad news. It is unlikely that we will ever 100% go to cash because marketing timing does not work.

Our clients do not like to hear this, but…

Another thing clients don’t like to hear is…we cannot tell when the market is going to bounce right back vs. a decline that is the beginning of a longer term correction. Most of the time the market bounces right back. Markets are often unpredictable and counter intuitive in short-term (less than 5 years). The solution is not to guess correctly. The solution is to be prepared for the full spectrum of potential events. This involves having enough safe, liquid money for spending needs of the next few years if you are retired, and an emergency fund of 3- 6 months living expenses for folks who are still working. It also means buying those investments that are on sale (and holding them even when the valuations get “more attractive”), and staying diversified.

When do you get back in?

Look at the chart below. When would you realistically have sold and when would you realistically have gotten back in?  The market frequently goes up and down a few percentage points on a weekly or monthly basis.  Therefore, investors do not “go to cash” until they see a sustained downtrend (usually near the bottom) and they don’t get back in until they feel safe, which is after a sustained uptrend (after they missed the recovery).

Best days frequently follow the worst days in the market:

Furthermore, if you look at the chart below of the 30 best and 30 worst days in the market, you will see that 6 of the 20 best days in the history of the stock market followed 6 of the 20 worst days ever in the market. Also three of the best and three of the worst days happened in 2020 within a four week period (highlighted below). So if your market timing strategy (or intuition) told you to sell your stocks on one of those knuckle-biting down days, you very well may be filled with regret the following day.

Bad market timing decisions have hurt the average retail investor:

As we frequently say, more money is lost preparing for corrections that never happen than is lost in actual corrections. For evidence of this likelihood, see the chart below showing how the average retail investor has fared compared to buying and holding a basket of stocks and bonds. 

Market timing is a loser’s game:

So, now that I feel like I have beaten this topic to death, let’s end with this: Trying to guess what investment markets will do in the next 6-12 months is a loser’s game. The long-term trend is up. That trend will continue as long as the population of the world continues to grow, people continue to invent new things, and companies continue to find more efficient ways to produce and deliver products and services. I think that is a pretty safe bet.

Questions, comments, need help with your financial planning or investment management?  Give us a call or send a message.