There’s plenty of evidence showing that binary market timing, or all-in-all-out moves around markets, is a good way to lose money. I’ve never even seen it work in back tests, which have the formidable advantages of perfect hindsight, zero emotion and no cost. Every time someone tells me binary market timing is possible, I ask for a successful back test, and I have yet to see one.
A second question is whether retirees have time to wait for stocks to recover. If history is any guide, the answer is most likely yes. There have been 10 bear markets in the U.S. since 1948, excluding the current one, as measured by a 20% or greater decline in the S&P 500 Index. The average number of years from peak to recovery — that is, the time it took for the S&P 500 to climb back to its previous high — was 3.9 years, and the median was 2.7 years. On five of those occasions, the market recovered in two years or less. In other words, market downturns tend to feel a lot longer than they are.
The third question cuts entirely in the opposite direction: With markets down and interest rates at historic lows, should investors borrow money to buy stocks? The answer is no. While it’s safe to assume that markets will recover eventually, the path is unknowable. That’s a problem for investors playing with other people’s money. If markets fall further before recovering — a distinct possibility given all the uncertainty, particularly in the U.S., where stocks aren’t cheap — those investors may be forced to sell at even lower prices to meet margin calls. Borrowed money robs investors of time, which is arguably their only edge.
Market downturns tend to provoke extreme reactions, and this one is no different. Yes, savvy investors can pick up some bargains by rebalancing their portfolios or even tilting toward their most beaten-down investments. U.S. investors might also lighten up on home bias, as there are better bargains in overseas stocks. But when markets are roiling, don’t discount the value of doing nothing. I had a seventh-grade shop teacher who used to say, “Sometimes I sit and think, and sometimes I just sit.” For many investors, this is probably a good time to just sit.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.