Timing Isn't Everything
by Will Porter
Inevitable as time itself, are the questions of “when do I sell?” and “when do I get back into the market?”. When the market turns and you see it impacting your portfolio, the thought is only natural - to ease the pain by selling out altogether. But if there is one thing that time has taught us, it’s that it works on your behalf as an investor. Someone much smarter than I (but only by a bit) once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't…pays it.” And that couldn’t be more true. The longer that your money is working for you, the more opportunity it has to grow. Riding through the ups and downs of the market with a steady hand is key to achieving long-term success as an investor. In this blog, we will look at some data to help drive this point home. Oh, and by the way, the person who said that about compound returns was Albert Einstein.
Professional investors, clients, meme stock traders and everyone else who participates in the market knows that a stock’s value will rise and fall in reaction to any number of inputs like regulatory changes, quarterly earnings, or someone’s latest tweet. That same group of people would also agree that they would only want their portfolio value to increase. However, that can’t be the case. While we are not able to predict when a pullback will happen, we can certainly expect them to. The chart below shows that over the 44 years from 1980-2024 an intra-year correction of at least 5% is all but guaranteed to happen. In fact, there are only two years over that period with a correction of less than 5% (1995 and 2017 both had a 3% intra-year correction). In other words, a market correction is totally normal and as investors, we should not react to them but rather stay the course and trust in our plan.
Source: LPL Research, FactSet
When you try to time the market, you create two decisions for yourself. When to sell, and when to buy back in. If both are timed perfectly, the benefits are clear. However, forcing yourself to make two impactful decisions leaves a lot of room for error. It reminds me of a quote from Woody Hayes. He was a legendary football coach at Ohio State who was famously reluctant to pass the ball. He said, “only three things can happen when you pass and two of them are bad”. Dropping or fumbling one – or even worse, both - of these decisions while trying to time the market will prove disastrous to your long-term returns.
The chart below highlights that point. It shows the impact of missing the market’s rebound days, which often turn out to be the days with the largest gain of the year. Historically, these days closely follow the worst days of the year. So, while investors that got out of the market are still licking their wounds, those who stayed invested are starting to enjoy the ride back up. It’s amazing how missing just 5 of those days can have such an impact – essentially leaving the portfolio with only 62% of the value of its fully invested counterpart.
Source: First Trust, Bloomberg
This leads me to another point on not selling a position or your entire portfolio when you see a loss – that the loss is only realized when the positions are sold. Brasada’s research approach helps us to see through the noise and to focus on what is actually newsworthy to the companies that we own. Is the market’s move due to something that will break our thesis on why we own the company? If yes, then we can act accordingly. If no, then we believe that the market’s fluctuations will soon subside and then the true value of the business as we see it will reflect in the stock’s price. This is one of the big differences in investing vs. trading. The latter will get caught in the headline news while we can remain steadfast throughout.
Not only does staying invested help to improve your long-term returns, it also helps to limit the volatility of your portfolio’s performance. As you can see below, investing in stocks for only one year can have a wide range in the total return – anywhere from a 52% gain to a 37% loss. As the portfolios holding period increases, we see that range decreases significantly. A well-balanced portfolio, invested over a long-time horizon is the best way to mitigate your risk and improve your odds of success.
Source: JP Morgan Asset Management
To bring this full circle, let’s illustrate the true value of long-term investing. According to the CDC, the life expectancy in the US was 78.4 years in 2023. Let’s say that on the day you were born in 1945, your parents put $1,000 into an account for you and invested it in the S&P 500. Although they were generous, they were a bit forgetful, because you didn’t know about this account and therefore it was left undisturbed until 2023. At first, you’re upset that you didn’t know about this money for all those years. Then your anger would be assuaged once you look at the account balance and see a few more commas and zeros. Over those 78 years, assuming that all dividends were reinvested, that gift from your parents has grown to $4,566,292.96 – a staggering return of 456,529%. Putting that in annual terms shows the power of compound returns. Your annual return would have been 11.26% over that period, which is a number that certainly sounds achievable. It turns out that Albert was right about compound returns after all.
Source: Officialdata.org
At Brasada, we don’t look for short-term gains or to act like day traders. We are looking for companies that we believe are leaders in their industry, with a solid runway to continue growing and whose value has insulation from the market’s ups and downs. This gives us a long-term lens. In fact, we have held some positions for our clients for over 20 years. Those stocks have performed incredibly well over that period. If we had listened to the voices on Wall Street and sold the stock based on some volatility in the market or because it had reached their price target, we would have left some returns on the table. By listening to our own research and by investing in the business rather than the stock’s price, we are well positioned to enjoy long-term success for our clients.
In the question of timing the market vs. time in the market, there is one clear answer. That staying confident in your convictions and remaining invested during times of volatility will lead you to long-term success. Time is on your side.
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