When faced with volatility as we have seen in recent weeks, investors have a dilemma: Do they try to time the market or wait, remain invested and hope the markets recover? Corrections can be difficult to stomach, so it is understandable that investors may want to react to declines of 10% or more. But many investors miss significant investing opportunities by trying to time the market. Even if an investor times the market perfectly, our research shows the long-term difference between perfect timing and not timing at all is negligible. Consider the following hypothetical:
Starting in 1977, three siblings each have $10,000 per year to invest in the global stock market. They invest for a period of 40 years. Each has a different approach:
*Returns are money-weighted, meaning they incorporate the size and timing of cash flows and place a greater weight on the performance in periods when the account size is largest.
Source: FactSet Inc.; as of 02/23/2017; monthly MSCI World Index Total Return from 12/31/1976 to 12/31/2016. Returns are net of international withholding taxes.
Even with 40 years of perfect timing of market downturns and corrections, Peter’s return is only slightly better than that of Nancy, who didn’t try to time the markets at all. In the real world, not only is perfect timing impossible, you likely introduce the risk of making investment errors along the way and locking in potential losses. Corrections are sentiment based, meaning they can occur randomly and last for any amount of time. Therefore, investors that try to time corrections may have increased transaction costs, incur higher taxes and miss the upswing from the bottom, which often occurs quickly.
Whether trying to pick the market lows in a given month or trying to get in and out of the market to avoid a correction, the best strategy for long-term investors is to wait corrections out. Corrections are common in a bull market and help temper rising optimism, which helps extend the life of the bull. Since corrections are sentiment based rather than due to economic fundamentals, they can bounce back just as quickly as they fall. Therefore, it is in investors’ best interest to be patient during corrections and remind themselves that provided they are patient, such downward movements won’t necessarily stop them from achieving their long-term goals.
Disclosure: Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.