With the stock market continuing to hit new highs, people often ask if they should wait to invest in the stock market. If they are already invested, they are worried about when the next correction will come. We are over eight years into a bull market (that's Wall Street lingo for an up market), and some critics are starting to call for the next downturn. Here are a few thoughts on investing in today’s or any market environment.
Timing Doesn’t Work
Market timing doesn’t work, period. You might be successful once, twice, or even a few times. But over time you aren’t smarter than the market. Nobody is! I invest clients' money for a living and I know that I’m not.
In order to successfully time the market, you must make not one, but two correct decisions. The first is when to purchase the investment. The second is when to sell. Even if you buy the investment at a low point, how do you know when it’s the right time to sell?
Time in the Market vs Market Timing
While there are no guarantees, as the adage goes,
“… it’s not about market timing but rather about time in the market.”
Numerous studies have shown that the chance of loss goes down dramatically with longer investment periods.
Chart: Betterment. Data based on S&P 500 daily total return data since 1928. The S&P 500 index is unmanaged, does not factor in transactional costs, and cannot be invested into directly. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature.
Timing Can Increase Your Costs - Especially Taxes
Timing the market comes with costs. First, there are transaction costs (i.e. commissions, bid/ask spreads, sales loads) associated with trading in and out of the market that can erode your returns.
Beyond transaction costs, there is the consequence of taxes if the investment is held on a taxable account. If you sell investments that are worth more than you purchased them for you will have a taxable gain. If the investment was held for less than a year, the gain is taxed at your regular tax rate. If it was purchased more than a year ago then the gain is taxed at the lower capital gains tax rate.
Regardless of the rate at which gains are taxed, frequent trading that results in capital gains can increase your tax bill. While investment decisions should never be made based on the tax implications only, frequent trading is generally a bad idea for most investors.
For most investors, investing should be a long-term proposition. Ideally your investment strategy will be tied into your financial plan incorporating your long-term goals, your time horizon for those goals and your tolerance for risk. Over time, even with periodic corrections factored in, the stock market has trended up over time.
Chart: J.P. Morgan Asset Management Guide to the Markets. Data shown in log scale to best illustrate long-term index patterns. The S&P 500 index is unmanaged, does not factor in transactional costs, and cannot be invested into directly. Past performance is not indicative of future returns. Chart is for illustrative purposes only. Data as of June 30, 2017.
Of course, there are no guarantees, and the markets can head down solidly over the short-term, but investors who have stayed invested over longer-term periods have prospered.
Timing the market is usually a bad idea, but time in the market generally pays off for investors. Give us a call to discuss your investments, your goals and for help in devising a long-term strategy to achieve those goals.
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.