By Jack Zhang, CIO of WEALTHSTONE ADVISORS
Research has shown that trying to time markets often leads to poor results, and even the best investors in the world can’t do it consistently. The year 2020 illustrated the enormous cost of market timing, as advisors who chose to go into cash at the nadir of the stock market missed out on a generational rally, costing their clients nearly a decade worth of returns.1
When an advisor opts to sell out of their stocks, they are betting that markets will go down. However, if they are wrong, they are faced with a difficult choice: do they continue sitting on the sidelines in hopes the stock market will fall, or do they buy back in at a higher valuation, thus crystallizing the lost investment gains for clients? A century of market and economic data shows that on average, markets and economies trend upwards,2 so sitting on the sidelines with excess cash often leads to continued compounding of the original mistake.
Data indicates many advisors and investors panic sold in Q1 2020.3 The following illustrates how hundreds of billions of dollars quickly exited the equity market right at the bottom, missing out on significant gains.
From a pre-COVID perspective, the consequences of “missing out” on just a few of the best-
performing days in the S&P 500 are also stark. If one missed out on the best 25 days from 1970
to 2019, an investor with a $1,000 original allocation would now have a portfolio worth $32,763
instead of $138,908, a difference of over four-fold.
In other words, if you try to time the markets, you could miss out on substantial compounded gains over time.
Moreover, with global markets sitting at all-time highs, those advisors with cash on the sidelines may be prone to additional mistakes, as the emotions of missing out on such enormous gains weighs on both them and their respective firms. As a firm with a strong evidence-based investment philosophy, WEALTHSTONE ADVISORS adheres to the principles of having a plan and sticking to it.
With a turbulent but ultimately successful 2020 now finished, we at WEALTHSTONE stand by our investment philosophy more than ever as we continue navigating these unprecedented markets. This is critical during times of market turbulence, as fear permeates the financial ecosystem and compels investors to sell when they shouldn’t. Because of our investment principles and proper risk management going into the crisis, we were able to follow our plan and buy into weakness, generating additional value for client portfolios.
Exhibit One: What Happens When You Fail at Market Timing
Exhibit Two: 2020 Market Review: Looking Back At An Unprecedented Year
1From 3/23/2020 to 2/23/201, the ACWI returned 78.9%. From 1/31/1990 to 2/23/2021, the ACWI has annualized at 7.4%. Source: Bloomberg
2From 12/30/1927 – 2/23/2021, the S&P 500 index has compounded at 9.6%. GDP has grown from $243B in 1947 to 21.5T in 2020. Source: Bloomberg
3Source: Dimensional Fund Advisors, Morningstar.
This was prepared by WEALTHSTONE ADVISORS, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. This information is intended to be educational and is not tailored to the investment needs of any specific investor. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. No investment strategy ensures a profit or guarantee against loss. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name. This is for informational purposes only. Past performance is not indicative of future results.