Over the last several years we have seen a lot of fluctuations in the stock market. These wild moves often tempt investors to move money in and out of the market trying to take advantage of these big swings. This is a risky strategy. Even more risky is constantly moving in and out of individual stocks trying to time their moves. When you time the market or a stock, you have to be right twice….when you buy and when you sell. Research shows that you would have to be correct 70% of the time to outperform the market. If you also add in waiting for a confirming signal that the market direction is changing, you would have to be correct virtually 100% of the time to outperform the market.
Innovest has done deep research on market timing and they have not been able to identify any funds that consistently outperform the market using a market timing strategy. Look at the two charts below put out by Morningstar.
The first chart from Morningstar shows the impact of exiting the market in 2009 (great recession) and waiting a year to get back in versus riding it out if you can. From late 2008 through the middle of 2013, you would have performed ~50% better if you stayed involved in the market.
Looking at the second chart by Morningstar, just a few number of days account for a big percentage of market performance. From 1994 to 2013 if you were invested in the market for the entire time your return would have been 9.2%. If you missed the 10 best days in the market during that period of time, your return would have been 5.5%. Quite a big difference. You could imagine how someone trying to time the market could miss those 10 days as they are busy with their day job, family, vacations, etc.
Investing in best in class companies in strong industry groups and then being patient is a solid investment strategy. Managing the portfolio to add or reduce shares of an existing holding after big moves in the stock also helps to enhance returns. A former colleague of mine used to tell me “buy right and sit tight!”
At Chatham Wealth Management we build custom portfolios of individual stocks and bonds and take a patient approach. We re-balance portfolios regularly based on market conditions. We use many different research resources and closely watch the securities in our client’s portfolios to make sure that our thesis on any give security is intact.
Please contact us if you would like a complimentary portfolio assessment and to learn more about Chatham Wealth Management.
Chatham Wealth Management