Importance of Staying in the Game

Blog post #419

Markets go up. Markets go down.

It can sometimes be difficult to stay invested, especially during down periods.

As the chart below clearly shows, staying invested and not trying to time the stock market is one of the most valuable pieces of financial advice that we can provide to you.

The data below is based on the S&P 500, which is an index of very large US based companies. The companies in this index are always changing, as companies get bought, merge, shrink and grow.

From 1970 through August 31, 2019, $1,000 invested in the S&P 500 grew to $138,908.

However, note the significant change in that outcome if you miss some of the top performing days.

If you were out of the market on the top 5 performing days of the S&P, your return would have declined by almost $49,000, from $138,900 to $90,170.

If you missed the best 25 days, the outcome dropped from $138,900 to less than $33,000, an incredible loss of over $106,000, from only 25 days over almost 50 years!

There are no proven ways to time the market. So market history and academic data says the best course of action is to adhere to your long term financial plan, which we develop with you, and stick with your stock allocation through up and down financial markets.

Sticking with your financial plan, and investing in stocks, will provide you with the best opportunity to reap the rewards that stocks can offer over the long term.

While we provide this data on large US based companies as an illustrative example to guide you not to try to jump in and out of the market, it is important to emphasize that we strongly recommend a globally diversified stock portfolio, with many asset classes, both in the US and Internationally, not just using the S&P 500.

While the S&P 500 has outperformed many other stock asset classes recently, this has not always been the case. There have been other long periods, such as most of the period 2001-2010, when other asset classes, such as US small value and most international and emerging markets far outperformed the US Large asset class, as represented by the S&P 500.

Do not try to time stock markets. That is not a winning game.

Over the long term, do not invest only in the S&P 500. That is not a winning game.

Over the long term, to have the best chance to reach your financial goals, you should be globally diversified across many asset classes, tailored to your individual and family’s need, ability and willingness to take risk, as well as your age and time perspective.

We look forward to talking with you to develop, or review, your portfolio.

Source:

“What Happens When You Fail at Market Timing”, Dimensional Fund Advisors,10/29/2019

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