Reaching your Long-Term Financial Goals and Timing the Market Don't Mix

February 26, 2019
As a small close-knit group, we often get together to discuss the events of the week.  This past week, one of us remarked that the stock market (as measured by the unmanaged S&P 500 Index) had advanced roughly 10% so far this year.  Which is extraordinary considering; a) we were only 45 days into the New Year, b) there had certainly been enough bad news in the media to derail any market advance, and c) things certainly looked a bit dire as 2018 ended.

No one knows (or should pretend to know) what this portends for the rest of the year, of course, but the positive results thus far suggest a valuable lesson to be (re)learned by all investors; You cannot predict with any certainty what the market is going to do – positively or negatively – based on the news-du-jour, or the myriad of year-end forecasts, soothsayers or technical indicators.  There are just too many variables involved to weigh and consider.  This lesson should be especially noted by those who are/were fretful about their asset allocation or the small dip in their account values last year.  

This is not to say “all’s clear” and one should throw caution to the wind, but it does suggest that trying to time the market or “pull your investments out because you think the market might go down” is just not a good idea nor a good way to manage your investments if you expect to reach your long-term financial objectives.

Asset allocation is often a delicate balance between long-term goals and risk tolerance.  While the time horizon for many investors may be decades out, suggesting their objectives could still be met even with a market decline or two along the way, some will still opt for a conservative approach and reject a more volatile, but potentially better-return strategy.  Which is fine; we’d rather have clients sleep at night than not and, given the trade-off between risk and return, it is fine if people feel better taking the less bumpy road to financial freedom.

But for those who do choose the bumpy-road-less-traveled, we’d be remiss in not reminding them that market declines are part & parcel of achieving overall good returns and as history has shown, enduring reasonable and acceptable volatility in a portfolio (instead of trying to outguess where the market is headed) is a preferable method of accumulating wealth and account value over time.  Call it an “investor’s premium” or “time deductible” or another favorite analogy; patience (and more than just a month or quarter’s worth) is a vital ingredient to investment success.