Put It in a Drawer
A few weeks back, I shared the discussion I had with a new Relaxing Retirement member who asked, “What is our strategy if we have another big market correction?”
You may recall that my first recommendation was to replace the word “if” with “when.”
If history is any indicator of the future, it’s not a matter of “if”; it’s a matter of “when”. In addition to the typical, yet temporary annual setback, they will experience multiple bear market corrections over the course of their lives.
As anticipated, I received a lot of great feedback from many of our members who found this discussion extremely helpful.
One of my follow-up conversations I had with another member was about one of the principles I revealed which is that market timing is not a successful investing strategy during any market cycle, including market crashes.
I have yet to meet anyone over the years who admits that what they’re contemplating is market timing. They always have a “qualifier/rationalization” built into their suggestion couched in “this event is unique/different” language when we’re faced with one of the dozens of market corrections I’ve witnessed over the years.
For clarity, Market timing is the strategy of attempting to sell in and out of markets on a timely basis in order to avoid large short-term losses and capture all upside gains. This stems from the commonly held belief, which is perpetuated by the financial media, that investment success is achieved by the few who are “in the know” who are able to successfully “navigate” in and out of markets at just the right time.
Unfortunately, history is littered with proof that this belief is false. Noted Professor Kenneth French’s extensive research concluded that you would have had to be precisely correct on the sell and buy points 74% of the time in order to equal returns earned by continuously holding shares through all market cycles.
And, that a survey of famous market timers revealed that only a handful were correct more than 50% of the time, and the best was still at only 66%!
October 2007 to March 2009
History and distance from traumatic times have a way of providing clarity for future action. However, at first glance, that’s not always true with investing.
Now that time has passed and markets have not only recovered but reached new highs, the market downturn we experienced over 18 months from October, 2007 to March, 2009 appears to be a period that anyone and everyone should have been able to navigate in and out of successfully.
What we all forget with time, though, is that we didn’t experience that 18-month period of time in one instance. We experienced it one day, and in some instances, one hour at a time.
From October 10, 2007 to March 9, 2009, broad stock market prices fell 50% on average.
However, it was not a straight line down that was obvious to interpret and act on.
Experiencing Markets on a Daily Basis
During that 18-month timeframe, if you recorded market results on a daily basis, here’s what you would have experienced:
- Market prices closed up 46% of the days, and
- Market prices closed down 54% of the days
Isn’t that incredible! During the 18-month period of time when market prices fell 50%, market prices closed up about 173 days (46%) and down about 202 days (54%).
I’m sure you expected it to be much worse than that with a much larger percentage of down days. (For reference, from 1973 through 2015, market prices were up 53% of days, and down 47% of days.)
So, as we experience markets on a day to day basis, that 18-month period wasn’t that different than the average.
What this demonstrates is that, when dealing with markets, our experience is never a straight line up or down.
Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……
That’s how we experience markets, and that’s what makes market timing impossible as a long-term strategy.
You not only have to make the correct call to sell out, and then buy in on the correct days, you have to make those calls at precisely the correct time during each day because prices change all day long. (And, because all asset classes behave and perform differently, you have to make those split-second decisions on each asset class you own.)
Just think of markets on the day after the recent U.S. presidential election. Dow Futures were down more than 4% in overnight trading after the election results came in. However, market prices closed up over 2% by the end of the trading day!
Although it feels as if there was throughout time, there is never a clear and unquestioned signal in the moment when a decision must be made to sell or buy. Never!
That’s why buying into the belief that you can successfully time when to get out and when to get back in is so destructive to your financial independence.
Put It in a Drawer
After you have set aside a bare minimum of five years’ worth of your anticipated withdrawals to support your lifestyle cashflow needs, the long-term solution with the rest of your Retirement Bucket™ is to remain broadly diversified and strategically weighted across several asset classes during all market cycles with a goal of capturing market returns within each asset class.
And, then “put it in a drawer” and go about living your life.
Go ahead and pull it out of the drawer during pre-determined periods of time, i.e. once a quarter, half year, or yearly, and rebalance your holdings back to your originally prescribed mix.
However, as we have just highlighted, do not delude yourself into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.
What this allows you to do is remain confidently invested for the rest of your life knowing you will not be forced to sell your long-term equity holdings during a temporary market correction in order to provide needed cashflow to support your desired and well-earned lifestyle.