In our communication last week (here) analyzing recent events in the market, we discussed the importance of following a long-term strategic plan. The research continues to bear this out. In 2019, Fidelity published research around this very topic. They modeled returns on an initial investment of $10,000. If that money stayed invested everyday over a 38 year period between January 1, 1980 and December 31, 2018, that $10,000 (with dividends reinvested) would have been worth almost $660,000. However, if that investment were out of the market for only the 5 best days during those 38 years, the final investment value drops to about $430,000. That's a 35% decrease for missing only 5 market days out 38 years! If, instead, that $10,000 missed the 10 best market days during that 38 year period, the final investment value drops to about $320,000. Again, that's a 51% decrease in return for missing only 10 days out of 38 years!1
What's the moral of the story? Investors will rarely be able to predict the best market days or the worst market days or when they will come. Investors have a better chance of meeting their long-term investing goals by creating a long-term risk-adjusted asset allocation plan that is designed to weather market ups and downs. This doesn't mean small, tactical changes can't or shouldn't be made. But those changes should be complementary to the overall risk-based investment allocation.
Today is a perfect example of this. Today, in the midst of the market turmoil surrounding COVID-19, the Dow Jones Industrial Average Index (DJIA) posted a one-day gain of 11.37%! This is the single best day for the Dow since 1933! Similarly, the S&P 500 Index posted a single day gain today of 9.38%, the NASDAQ was up 8.12% and the Russell 2000 was up 9.39%. This was truly a case of "a rising tide lifts [nearly] all boats."2
There will almost certainly be more volatility. We aren't through the woods just yet. But the point is - we won't know when the markets are turning the corner...until they've already turned that corner. Attempting to time the markets only increases the probability that an investor locks in losses while being on the sidelines when the market rallies.
2 www.cnbc.com - March 24th, 2020
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