Think: Time IN The Market, Not Timing The Market

Think: Time IN The Market, Not Timing The Market

February 03, 2022
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“There are only two types of people: those who can’t market time, and those who don’t know they can’t market time.” Terry Smith

What a start to the year for the stock market. January 2022 suffered its worst month since March 2020 and biggest January decline since 2009, down 5.3%.

Granted, as alluded in last week’s post, these 5-10% pullbacks are not only common, but they are also generally expected. What stands out, compared to prior years, is the intensity of these market swings.

Within a single trading day, we have seen the markets decline dramatically during the morning only to finish the day higher. With the increase in volatility, let this serve as a friendly reminder: do not try and time the market.

People can be in such a rush or have no patience when it comes to investing. And I don’t necessarily have a problem with that. I’ve mentioned that everyone has their own objectives when it comes to investing.

Some investors are looking to profit on short-term swings and others are in this for the long run. No matter your investment philosophy, you don’t need to be able to predict the stock market in order to make money.

You will hear investment professionals try to predict and understand where the market is going and digest if we have reached a market top or bottom. No matter their credentials, the answer is WHO KNOWS.

Yes, as an investor you should always be conducting research and looking for certain trends. You can identify patterns that might indicate buying opportunities or suggest that you trim your positions.

But you should avoid falling victim to the common phrases: “Sell now, before it’s too late’. ‘Buy the dip.’, ‘A Market Crash is Imminent’. ‘Rotate into Cyclicals’.

This is all just noise. There are professionals who make a living trying to forecast where the markets and economy is headed. All of them are a hell of a lot smarter than I am so I mean this with all due respect: Forecasters don’t know anything, and a wise man once said, “if you must forecast, forecast often.”

Now hearing these words is one thing, but history and math back up these statements.

Nick Murray has been in the financial services business for over 50-years. His team looks at various rolling periods (from 1926-2021), with dividends reinvested, to see the likelihood of positive returns for the S&P 500:

1-year – 75.72%

3-year – 84.24%

5-year – 88.29%

10-year – 94.48%

15-year – 99.69%

20-year – 100%

In summary, three out of four rolling one-year periods show positive returns for the S&P 500. Over a 20-year period, your S&P 500 investment would have a positive return 100% of the time. Now history is no guarantee of future performance, but I like those odds.

Another thing that jumps out to me, is that time in the market can erase even the deepest temporarily declines. Which brings me to my next point.

The true power of investing is money compounding. Yes, hitting a home run is a desire we all want. But I like to visualize myself starting off with a small snowball and rolling it down a hill. That small snowball will build momentum and continue to grow in size without any effort. Nick Murray put it best - wealth is capital which continues to compound (can you tell I recently read a Nick Murray newsletter?).

As an investor, it’s so tempting to think to yourself, “what if I buy a stock/fund today, and then it goes down? Should I just wait until tomorrow or when the markets cool off a little bit?”

While this line of thinking can be viewed as completely rational, do not wait for that “perfect” entry point, because who knows when that even is. History shows that when you put your money to work, over a prolonged period of time, you will be rewarded.

Charlie Munger has summed it up nicely – selling for market-timing purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and if it does, you’ll have to figure out when the time if right to go back in.

So, if there is one takeaway from this post, let it be this: capital that is not growing is dying.

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.