The past year, 2017, was by any measure, an amazing year. The U.S. and international markets ignored North Korean missile threats, Presidential fire and fury, hurricane devastation, a ballooning national deficit, and yet produced the following broad market gains:
* The Wilshire 5000 Total Market Index — the broadest measure of U.S. stocks — finished the year up 20.99%.¹
* The Standard and Poors 500 Index of large company stocks returned 19.42% by the end of 2017.²
* The Russell Midcap Index finished 2017 up 18.52%.³
* The Russell 2000 Small-Cap Index gained 14.65% for the year.³
* The technology-based Nasdaq Composite Index rose 28.24% for the year.⁴
* In international stocks, the broad-based EAFE Index of developed foreign economies ended the year up 21.78%.⁵
* Emerging market stocks of less developed foreign countries, represented by the EAFE EM Index, posted a 34.35% gain for the year.⁵
* In the bond market, the coupon rate on 10-year U.S. Treasury bonds rose 2.41%.⁶
* Thirty-year municipal bonds yielded 2.62%.⁷
Last year’s market performance caps a span of time from 2009 up to the present in which there have been no significant downturns, and returns have been generally upward. The questions on many people’s minds are “How long can this last?” and “When should I get out?” Many investors who tried to time the market concluded over a year ago that the party was over, and cashed out their holdings. Then, they watched on the sidelines as the Dow Jones Industrial Average captured record high after record high. It’s a demonstration of how difficult it is to predict market performance.
Timing the market is made even more difficult by the fact that you have to be right twice — when to get out, and when to get back in. The result for most people is missing out on periods of exceptional returns, taking a hit to the value of their portfolios, and suffering a setback on achieving their most important life goals.
The penalty for mistiming the market is high. For example, investors who stayed in large cap stocks for all 5,218 trading days between the beginning of 1997 and the end of 2016, achieved a compound annual return of 7.7%. If they missed only the 10 best days of stock returns in 19 years, they would have received only 4.0%. If they missed the 50 best days, they would have lost 4.2% per year.⁸
Trying to avoid bear markets (markets when stock values go down) is not that productive for long-term investors because bear markets tend to be short, and eventually come to an end. Bear markets have lasted on average less than two years since 1970. As long as you didn’t panic, even the terrible Great Recession of 2008 and 2009 was not a disaster. You would have recovered in four years.⁹ By comparison, many people spend 25 to 30 years in retirement.
A broad, globally-diversified portfolio that balances all the asset classes is effective at tempering market fluctuations, and is well-suited to achieving long-term goals. Rather than stewing over when to get out of the market, your time and energy may be better spent maintaining a long-term outlook for your investment strategies, and working with your advisor to develop a comprehensive financial plan that is aligned with your life goals.
⁸ Loring Ward, 360 Insights, winter 2018
⁹ Associated Press, March 5, 2013