MARKET TIMING: WHAT RECENT AND HISTORIC MARKET RETURNS HAVE REVEALED

July 14, 2020

An apt description of markets in 2020 may have been written by Charles Dickens 161 years ago, “It was the best of times, it was the worst of times...” After achieving record highs for the Dow¹, S&P 500² and NASDAQ³ indices February 12th, the markets began their unprecedented descent February 20th, resulting in a 37% fall in just 28 trading days. One result was that individual investors—some unsure but many in panic—withdrew $62 billion from equity mutual funds during that short period, and then an additional $71 billion during the following two months. So, a total of $133 billion was thought by these investors to be shielded from further market losses.⁴

But, was a shift to cash rewarded by following this market timing strategy? Unfortunately, for many of these investors, the answer is a resounding “No”. More specifically, the S&P 500 has risen 42% since its March bottom, and is now only 6% shy of its record February high. Let’s look more carefully at the potential results of market timing in 2020.

Year-to-date, there have been 132 trading days when markets were open. As shown in the graphic below, if an investor were out of the market, i.e. in cash, for only 5 of the best trading days (or just 4% of the total period), then the investor would have suffered a 30% portfolio loss compared to another investor who remained fully invested throughout 2020. For a $500,000 portfolio, that potential shortfall translates into $150,000 of foregone income, more difficult to replace once an investor is in retirement. 

However, some might say that 2020 was an unusual year for the markets, so it is inappropriate to use it when judging the potential value of market timing. Yes, there is the pandemic, restricted mobility, a general election, trade wars and immigration issues, so 2020 is indeed unusual. However, why not test the value of market timing over a longer period, say 20 years, which could smooth out such market uncertainties?

As shown in the graphic below, the actual results of market timing strategies during the 2000-2019 period are even more dramatic. The overall annual return for an investor remaining fully invested during this period was 6.06%, despite the Tech Wreck of 2000 and the Great Recession of 2009. However, if an investor missed only the 10 best of the total trading days of 5,037 (or 0.002% of the total period), then the annual return would have fallen to 2.44%, or a shortfall of 3.62% per annum. Missing the best 20 days would have seen the annual return fall further to 0.08%, well below the 2.17% annual inflation rate occurring during this period. Missing more than the 20 best days, as shown in this graphic, resulted in annual returns of negative 1.95% to negative 7.02%.

Source: JP Morgan Asset Management

For investors contemplating such market timing strategies, a follow-on question is inevitably “When do I reinvest all this cash?”. Based upon the historical data, the most appropriate answer may be “very, very quickly”, as 6 of the best 10 market return days over this 20-year period occurred within just two weeks of the worst 10 days. More specifically, the best day of 2015 (August 26th) occurred only 2 days after the worst day of that year. Imagine the potential trading costs and tax consequences of such a short-term trading strategy, especially if done on a frequent basis. 

The Mather Group eschews market timing, whether it’s done by individual investors or in the oversight of your retirement portfolios. Your financial plan is based upon many factors key to the achievement of your long-term goals, and market timing is assuredly not one of them. Attempting to time the market is self-defeating, as shown by both historical and more recent data, and too often results in foregone returns which may be difficult to recapture in subsequent years. If you have further questions or ideas which you would like to share with us, please do not hesitate to contact one of The Mather Group’s professionals.

The Mather Group (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training.  The  opinions expressed, and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on The Mather Group’s research and professional experience and are expressed as of the publishing date of this communication. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The Mather Group specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice nor is it intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation.

Indices:

¹ The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a price weighted stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.

² S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation, among other factors by the S&P Index Committee, which is a team of analysts and economists at Standard and Poor's. The S&P 500 is a market-value weighted index, which means each stock’s weight in the index is proportionate to its market value and is designed to be a leading indicator of U.S. equities, and meant to reflect the risk/return characteristics of the large cap universe. See

³ The Nasdaq Stock Market, also known as Nasdaq or NASDAQ, is an American stock exchange located at One Liberty Plaza in New York City. It is ranked second on the list of stock exchanges by market capitalization of shares traded, behind only the New York Stock Exchange. The term, “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, and Intel.

Sources: Bloomberg; ⁴ Investment Company Institute; JP Morgan Asset Management; Reuters; Wall Street Journal; Wikipedia