Finding a fresh way to express an old precept is a useful hook for engaging clients who need a little more hand-holding than others in periods of volatility, and a new data analysis on what investors actually lose when trying to time the market may provide just that.
To answer the question, “Why is trying to time the market a bad idea?”, Vanguard Group’s Investment Advisory Research Center (IARC) recently looked at the performance of equities from June 1996 to March 2024, which yielded a 9.7% annualized return, or 1,218% cumulatively.
While this certainly included several historic bull-market runs, it also included five bear markets where stocks dropped between 20% and 55%, the dot-com bubble, the Global Financial Crisis and a pandemic, the analysis noted.
“Everyone would love to miss out on the worst days,” said Chris Tidmore, senior manager at IARC. “But the really important thing is when you do that, you usually also miss out on the best days, because the two usually cluster together.”
Because volatility means ups and downs in the same time period, the IARC then looked at the extremes of daily highs and lows and found that bull market volatility is less violent than bear market volatility.
In a bull market, the average daily return is 0.1%, but the greatest single-day gain was 7.2% while the greatest single-day loss was a drop of 7.0%. But in a bear market, where the average daily return is negative 0.1%, the greatest single-day gain was 11.4% and the greatest single-day loss was negative 12.3%.
“Even when the market’s going down, you get more volatility, which includes really bad days and really good days. Thinking of the fourth quarter of 2008 would be a great example. On average you’re ending up with more bad days than good days,” he illustrated.
But on the other side of that, as the market turns around, there’s still volatility, but investors tend to have more good days than bad.
“This would be turning the corner as we did in the first quarter of 2009,” he said. “All you need are three good days combined with two bad days, and together can end up with a good week if there’s a lot of movement.”
Investors who are out of the market and waiting for a bear market to reverse can easily miss out on those best days. So the IARC illustrated what would happen to a $100,000 investment in a balanced 60/40 portfolio if the five best days were missed over that nearly 30-year timeframe.
If that portfolio was fully invested and just left alone, the $100,000 would have grown to $865,000. But if an investor was trying to time the market and accidently missed out on just the five best days over those 28 years, the $100,000 would only grow to $659,000. Miss the best 10 days, and the investor would end up with just $540,000.
“What is the objective of investing? The objective is to meet your goals,” Tidmore said. “You usually have put together a portfolio that is based on long-term expectations. If you’re trying to time the market, you’re adding additional risk that you’re not going to meet the returns you require to meet those goals.”
And finally, Vanguard's IARC looked at the probability of positive returns versus negative returns based on what just happened with the markets.
So far this year, the U.S. stock market has been on a tear—it hit 19 new highs in the first quarter, finishing the period with an S&P 500 gain of 10.2%. This may lead some investors to think a correction or bear market is right around the corner and they should get out while the getting’s good, Tidmore said.
But even if they might be right, they’re wrong to let that inspire a withdrawal from the market, the data showed.
It didn’t matter whether the last quarter, last two quarters or last year was positive or negative. Why? Between 60% and 80% of the time, the next quarter, two quarters or year had positive returns, according to the data.
Rebalancing portfolios is actually a far more logical way to turn volatility to clients' advanta.ge “If the market goes up, you need to rebalance the portfolio. Same if the market goes down,” he said. “But this idea of getting out of the market is just not constructive.”
To help their clients ride the waves, according to Tidmore, advisors need to turn on their coaching skills and bring their clients back to the financial plan.
“You can start with goals, but everyone says they want money in retirement and for their kids to go to college. Understanding what’s under that, that’s where their values are,” he said. “What are their dreams? What do they think about money? What is the importance of money to them? What do they want their legacy to be? These are the things you can tie wealth to.”
From there, setting reasonable expectations around the ups and downs along the way that lead to the fulfillment of those dreams and expectations is where good advisors show their value, he said.
“That’s when you can say when we’re in some crazy environment, ‘The market may be pulling back and your portfolio’s down X percent. But the probability of your meeting your goals hasn’t changed,’” he said. “There are things advisors have to react to, unfortunate things like death, divorce, unforeseen job loss. You have to react to that. But you can be proactive about how the markets work.”