It’s harder than you think to time the market. You have to pick the right day to get out. Then you have to pick the right day to get back in.
That’s why the pros strongly counsel against it, and advise you instead to start off with the right allocation mix and stick with it unless your situation or needs change.
Of course, not everyone will follow that advice. Vanguard looked at the results of a very small minority of investors who sold out and went to cash in March when the COVID crisis first slammed the stock market.
The numbers of investors who did sell or make trades was low, according to Vanguard. Only 5% to 20% of account holders, depending on the type of account, made any changes at all to their portfolios, and less than 1% went entirely to cash.
So how did those panicky investors fare? Vanguard ran the numbers to find out.
At the end of March, when the stock market was getting pummeled, many of those who sold were probably feeling happy with their decision. About 60% of them were doing better than they would have done had they stuck with their pre-pandemic portfolio.
But as the days went on and the market recovered, most were certainly feeling a serious dose of regret. By the end of May, roughly 86% of those investors were doing worse with their new “cash” portfolios than they would have done had they remained faithful to their original mix, reported Vanguard. Those who de-risked their portfolios by moving to cash would be even worse off now, in August, given the market’s continuing rebound from the end of May through today.
The Takeaway: We won’t say it never works to sell in a downturn, because there are exceptions to every rule. But it is fair to say that timing the market is much harder than it looks. In fact, if it worked, we would be doing it ourselves.
But experience shows it does not work, and almost always leaves you worse off then you were before. Trading in response to emotional triggers (like fear) leads to bad results. Our job, as your advisor, is to protect you from yourself, and help you stay on the proven path to solid long-term results and economic freedom. That’s something we’ll all need to keep in mind as we get closer to the elections and a new set of portfolio jitters.