Blog #488

Cost of NOT staying in the market

We have often talked about the importance of staying in the market. Think long-term. Stick with it, through the good and bad markets, to reap the long-term benefits that investing in stocks can provide.

It can be hard to remain invested in stocks (appropriate to your personal stock allocation), especially when stocks are declining. It can be particularly difficult to remain invested in stocks during periods of great uncertainty, such as in the spring of 2020, at the onset of the Covid pandemic, or in 2008-09, during the Great Financial Crisis.

We want to share some thoughts and data with you, while markets are good….so you can be mentally prepared the next time markets decline significantly in the future.

Missing only a few days of strong returns can drastically impact your overall investment performance.

While we recommend a global and broadly diversified allocation mix of stocks, for purposes of this discussion, we are using the S&P 500 Index, from January 1, 1990 – December 31, 2020. Note that the companies in the S&P 500 Index are primarily US Large companies, and the companies in the Index change over time, as the economy changes, as companies grow, merge, are bought or their financial performance declines and they are removed from the Index.

As the chart below reflects, if a hypothetical $1,000 was invested in the S&P 500 in January 1990, it would have grown to $20,451 by the end of 2020. The increase over this 30 year period, including all kinds of economic and societal changes, most of which could NOT have been anticipated in advance.

  • Staying invested and focused on the long term would help you to better capture the benefits that the stock market has to offer.

However, if you had missed only a few of the best performing days during this 30 year period, the growth of the $1,000 would be dramatically less. If you had missed the best 25 days over the last 30 years, $1,000 would have only grown to $4,376, which is only 21% of what you would have had if you had left the money in the S&P 500 the entire period. Let’s review the results**:

There is no proven way to time the markets – trying to target the best days and to get out of the markets to avoid the worst days. History argues for staying put through the good times and the bad.

We further reviewed the best 15 days of the last 30 years of the S&P 500, which are provided in chronological (date) order, in the table below. There are a few key lessons to be learned from these large daily increases:

  • The significant daily gains all occurred during times of great uncertainty and fear among investors, during periods of great volatility.
  • They occurred in three groups, days in 2002 (during the tech meltdown and during a number of corporate scandals, including the Enron crisis), 2008-09, and in the spring of 2020, at the onset of the Covid-19 pandemic.
  • None of the top 15 days occurred during times of relative calm for the US stock markets.
  • None of the top 15 days occurred during times when markets had been rising for a few years.
  • Some of the days were during bursts of market rebounds, shortly after a bottom had been reached (but few would have known it was the real the bottom at that time).
  • However, a number of the days occurred during huge downturns, but the markets continued to decline even further after these large gain days, before they eventually recovered.

Financial history teaches us that is important to be patient and stay the course during times of economic crises, when stocks are falling, to reap their long-term benefits.

We do not know when financial markets will next incur a significant decline. Hopefully reviewing data like this, when we are not in the midst of a scary period of stock decline, will provide you with the mental fortitude to adhere to your planned stock allocation when future downturns occur.

 

Talk to us. We want to listen to you. we want to assist you, your family members and friends.

Source and disclosures:

** “The Cost of Trying to Time the Market”, can be found at this link Dimensional Fund Advisors, www.dimensional.com, 7/6/21. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 Index at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

***Information provided to WWM by DFA.
As noted above, WWM generally invests in globally diversified portfolios for their clients, which would include various US, International and Emerging Market asset classes, not just US Large Companies, as represented by the S&P 500 Index. The use of the S&P 500 Index in this article is for illustrative purposes only. The Index does not reflect the expenses associated with the management of an actual portfolio, including any advisory fees that WWM would normally charge.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

 

~ Developing Relationships by Doing the Right Thing ~
Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

 

How does your financial advisor invest?

Blog post #487

You should want to know and understand how your financial advisor invests his or her own money, and whether they invest it in a manner that is consistent with the recommendations that they make for you.

This is an important matter that you should ask about. Surprisingly, very few clients or prospective clients ask us about this.

Our answer is a clear yes. The partners of our firm invest our assets in stock and fixed income mutual funds or ETFs that are the same or consistent with the investments that we recommend to our clients. And relatives of the partners who are clients are invested in the same manner as well.

If you are not a client of our firm or have an account with a major brokerage firm or bank, the answer from those brokers and advisors may likely be very different than ours. If your advisor is investing differently than their recommendations, that should concern you. It should lead to more questions. Maybe that should lead to a conversation with us.

Investing our money alongside our clients is one of the guiding principles we have had since the inception of our firm. For example, I own the same US large, US small value and International large value fund that we recommend for your portfolio (or ones that are very similar in investment strategy and philosophy). If you own an International Core fund, I likely own the same one. You get the picture. The exact allocation of the investments that I own may be different than yours, as the allocations are based on each person’s specific situation. The same goes for Keith, my partner.

We feel this is a vital distinction. Our investments and interests are aligned with yours. We have the same skin in the game as you do. If you are making money, we are making money. If your accounts are going down, our accounts are going down.

I learned many years ago, prior to forming our investment advisory firm, that this was not always the case. In various situations, I realized that some brokers were making recommendations but not investing their own money in a manner consistent with how they advised their clients.

I asked this question when meeting with the brokers who managed my prior firm’s profit-sharing plan. I was very surprised to learn that the brokers, who were close in age to myself (so should have had similar objectives, goals and time-frame), did not own investments or have portfolio allocations that were consistent with what they were recommending to our firm. This made no sense to me. This was a defining lesson for me.

We don’t make recommendations to you and then do the opposite for ourselves. As a guiding principle, we follow the same philosophy and recommendations for ourselves that we provide to our clients. We are consistent in this manner.

This is another reason that you should be confident and comfortable with our firm and our principles.

Your financial future is based on our recommendations and financial advice. Our financial future is dependent on the same investments, strategy and philosophy.

Shouldn’t it be this way?

 

Talk to us. We want to listen to you. we want to assist you, your family members and friends.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com