To our clients and associates,
By now you’ve seen the reports that last week’s market rise was the best weekly advance since 1974. In fact, the market is now about 23% above its recent market bottom. This of course is due in part to the optimistic view that China and Europe have begun to unwind lockdowns. Additionally, hot spots for COVID-19 here in the U.S. appear to be peaking.
Unfortunately, while hopeful, this may lead investors to a false sense of security. The true fallout of 20 million unemployed Americans is yet to be felt. Earnings for most corporations will clearly be down, yet the full impact is unknowable.
You are probably thinking, “Is this commentary really from Al Wooster? He’s usually so optimistic.” And I am – for the long term. At the same time though, I want to be realistic about the short term impact of full industries being shuttered. The global impact of this could potentially rival or exceed the ’07 - ’09 Great Recession.
Here is something I hope we have learned from that period. Market timing simply does not work. It has been proven throughout the entire history of the markets that no one has ever successfully determined the best point to get out of the market and successfully picked the best time to get back in. Here’s an example of why this is true. (Quoting from Success Magazine Jan/Feb 2020 with data provided by Yahoo Finance)
“Let’s assume you invested $10,000 in the S&P 500 for 20 years between January 1, 1998 and December 31, 2017. If you didn’t touch that money, you’d have earned a 7.2% annual return.
Now let’s pretend you tried to time the market and missed some of the days with the biggest gains during those 20 years. Here’s how your return would’ve changed if you missed:
- 5 days: 5.02%
- 10 days: 3.53%
- 20 days: 1.15%
- 40 days: -2.8%
That’s a negative 114% change that can result from missing just 40 of 5,036 trading days.”
Here’s still more information from this month’s Investment Advisor publication. From January 3, 2000 to December 31, 2019 six of the ten best performing days in the S&P 500 occurred within two weeks of the 10 worst performing days (emphasis mine). The message is this: If you have a bad day in the market, hold your breath, hang on and wait a while. (Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.)
Anecdotally, I can tell you that of the clients who attempted to time the market by lowering their equity exposure during the Tech Bubble in 2000 or the Great Recession in 2008, none of them recovered as fast as clients who maintained their positions. The clients who hung in there endured a 15% market drop in just 5 days at one point, yet were rewarded for their patience over time.
A client shared her fear of the pandemic and asked: “Why does it feel so different this time?” I used an analogy: Do you remember being a teenager and having your first true love dump you? At the time, it felt like the end of the world. Why? Because you had never experienced it before, which meant you didn’t have the knowledge that you would make it to the other side. You didn’t know that you would live through it and move on to even better things in your future. (Am I the only one this happened to?)
It’s the same way for all of us experiencing our first pandemic with its inherent isolation and social distancing. We have never experienced anything like this so we have no real-world knowledge that we will in fact get through it. Yet we will rise above this and prosper in the future. How do I know this? … because we always have.
Wishing you the best,
Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.