Downturns are common, even in the current bull market run. Think of them as foul weather out at sea. We can’t control the weather and we can’t control the markets. We chart a course and come up with a plan. Rarely, does the experience go exactly to plan. There will be bumps along the way but there are mitigating allocations (bonds) that help reduce the rockiness. As a ship adds size to its hull it adds stability, similar to adding bonds to a portfolio. However, added size also reduces hull speed, similar to how adding bonds reduce the expected long-term growth of a portfolio. Some people don’t mind the rockiness and can be comfortable on a faster boat. Others need the stability of a cruise ship.
There will bumps along the way, however, over periods of 10 years or greater, the chance of experiencing negative returns is greatly reduced. Data from 1927 through 2017 for various rolling time periods. For all 1-year holding periods from 1927-2017, there was a 26% chance that you experienced negative returns. For all 10-year holding periods, there was a 5% chance. For all 20-year periods, there was not a single holding period that experienced negative returns. Source: Morningstar
An attempt to “time” the market is incredibly difficult to do and can compromise your financial future. Not only do you have to correctly guess when to sell stocks and place the proceeds in cash. You then have to invest the cash back into stocks. History has shown that downward and upward volatility tend to cluster; meaning the best days in the market occur near the worst days in the market. This means that the decision to reenter the market, correctly timed, will be very emotionally difficult to do as the news headlines will be littered with market sell-off commentary and fear--pessimism will be running high. In the chart, it illustrates the ill-effects of timing the market. If you missed the best 25 days in the most recent 20 years in the S&P 500, your $1 million investment would have declined to $898k. Had you remain invested it would have grown to $3.5 million.
Cory Nakamura, CFA, CFP®, PPC®
Chief Investment Strategist
Mosaic Pacific Investment Advisors
Honolulu | Hawaii