By Eric Reich
In the world of casinos, there are quite a few bets that would be considered a “sucker bet”. That’s a bet that seems like a good idea with enticing odds that almost never works out. In the world of investing, one of the all-time sucker bets is market timing. On the surface, market timing seems like a pretty easy thing to do. In reality, it is nearly impossible, and the odds of losing money are nearly certain. Why then do we constantly try to place sucker bets when it be casinos or investing? Marketing and media coverage is certainly one of the primary drivers. At the casinos, my wife is immediately drawn to the “Wheel of Fortune” slots. Yes, she knows slots are one of the classic sucker bets in a casino, but whether it’s the flashing lights or simply the lure of a big jackpot, she plays them every time we go. The odds are surely not in her favors vs. other casino games but the temptation is just too great for her.
Market timing is so dangerous because honestly, it just seems pretty easy to do. I hear on a weekly basis, clients try to rationalize why they want to wait to get into the markets or why they think this year is going to be bad, good, etc. They rationalize that sitting in cash for a while can’t hurt because “at least I won’t lose any money”. The reality is yes, you are losing money by sitting in cash. In periods of higher inflation, you are losing the inflation rate minus the small amount you are being credited in your cash account. Last year this could have been as much as 7-9% loss. When economic news is virtually all bad and remember that “bad news sells” in terms of viewership or readership, then suddenly everyone becomes market or economic experts.
So what’s the big deal? If I’m wrong, and I get into the market a little later than everyone else or I come in and out a few times at least I can sleep at night, right? Well, let’s look at what a big deal it really is and maybe you’ll be losing more sleep than you thought. Here is what the real data tells us.
If you invested $100,000 in the S&P 500 on January 1, 1995 and left it there through February 28, 2022, you would have the following compound annual growth rates*:
Stayed invested = 8.7%
Missed the best 10 days = 5.6%
Missed the best 20 days = 3.6%
Missed the best 40 days = 0.3%
Missed the best 50 days = -1.3%
That’s a 10% per year return difference for only missing 50 days. Do you honestly believe you know which 50 days out of the next 26 years are going to be the best ones? When you put the data on paper, it seems ridiculous that anyone would even try to time the market, yet it’s a conversation we have all the time with clients. Missing the best 40 days assuming you started with $100,000 cost you close to $800,000 in lost earnings. I often joke with clients that while fees are very important, I’d much rather pay a small fee than lose out on close to $800,000 in this case. Always make sure you’re focusing on the big picture.
Turn off the noise, stop trying to guess when a good or bad time is to invest, and simply invest your money in low cost, well diversified portfolios and leave it alone. The market will do all the work for you and save you from making yet another sucker bet.
*Source: Fidelity. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations. A lifelong resident of Cape May County, Eric resides in Seaville, NJ with his wife Chrissy and their sons ,CJ and Cooper, and daughter Riley.
