Woody Allen once said, “Eighty percent of success is just showing up.”
That seems like a pretty low standard. But in Allen’s experience, most of the people who wish they could have a book published, a movie script produced, or an acting career, don’t ever attempt it. While the people who have success in these areas gave themselves their biggest chance by simply showing up.
It turns out that a similar principle is true in investing. While a carefully-planned asset allocation is important, simply being present in global markets may have a much more significant impact on long-term returns.
Market Timing: Out Too Late, In Too Late
Nobody wants to be in the market on days like September 29, 2008 or February 5, 2018 when stocks appear to be in a free fall. Seemingly every headline and financial news outlet piles on, amplifying with scary graphics about how months of gains are “wiped out” in a few hours. However, the problem with selling your investments in response to this type of volatility is that, by the time you find out about the drop, it’s too late.
Even if you were watching the market minute-by-minute, it would be difficult to tell if a drop in prices was just a downtick or a sustained downturn, until you could see significant losses. So by the time many investors finally give in to the temptation and sell, it’s more often closer to the next market bottom than the more recent top.
Even worse, being out of the market for any length of time can greatly increase your chances of missing unforeseen gains. These are the unexpected “best days,” which sometimes occur after major losses, and can make up a significant percentage of a calendar year’s returns. And over the long-run, missing just a few of the markets’ best days can be hazardous to your wealth building plans.
Potential Cost of Missing The Best Days
This graph shows a hypothetical example of returns for $1,000 invested in the S&P 500 index from 1990-2017. You can see that the cost of missing the single best day in the period is $1,426, 142% of your original investment. While the cost of missing the five best days is $4,625. Missing just the 25 best days reduces the available returns by more than half!
The point is that out of the more than 7,050 trading days during that period, being absent for just a few of them can have a significantly negative impact on your total return. Since predicting consistently and accurately ahead of time exactly when those days will occur isn’t possible, the wisest thing you can do is simply be there for all of them.
We often refer to this phenomenon as the Discipline Dividend. It’s the implied return that should accompany staying dedicated to your strategy through even the scariest market conditions. After all, the risk of an unknown future is part of what we’re relying on to be able to expect any return at all. So the notion that we could somehow avoid the risks but be entitled to the returns isn’t just unreasonable, it appears it isn’t even feasible.
Knowing the facts about staying in the market is important. But when prices are dropping and the financial media is shouting from the rooftops, head knowledge might not be a strong enough motivation. It takes uncommon discipline to stay the course. And that’s where your trusted financial advisor can help.
When everybody you know is talking about selling, wecan help you resist the emotions that will keep you from “showing up” and help you stick with the plan that gives you the best chance of reaching your investing and retirement saving goals.