HOW MIGHT YOUR RETURNS LOOK IF YOU MISSED THE FIVE BEST DAYS OF THE YEAR?
Mark Lister, 14 July 2020
This year has taught investors and market commentators many things, as periods of turmoil often do. One important lesson has been a stark reminder that it’s foolish to believe you can time the market over the short-term.
Having been down more than 30 per cent at one point this year, world shares have recovered much of their losses and are now close to breaking even this year. The NZX 50 is up 0.6 per cent in 2020, while the S&P 500 in the US is down just 2.1 per cent.
However, the rebound was equally as sharp as the decline, and if one had missed the five strongest days of the year things would look very different.
For the NZX 50, the five best days saw an average gain of 4.2 per cent, and without them the marginal rise this year turns into an 18.1 per cent fall.
It’s even more pronounced in the US, with an average gain of 7.6 per cent for the S&P 500’s five best days. Missing those would’ve decimated your returns, turning a 2.1 per cent fall into a whopping 32.1 per cent loss.
This highlights just how difficult it is to time the market in the short-term. Even if you were good enough to go into the February bear market with high levels of cash, you’ve only benefitted from that if you were also good enough to know when to jump back in.
If you weren’t, you’re no better off than someone who simply sat back and waited it out.
Even worse, if you panicked during the first half of March and sold somewhere near the bottom (or switched your KiwiSaver from a growth fund to a conservative fund), you’ll have almost certainly missed out on the vast bulk of the rebound.
This is the risk we take when we misguidedly think we can predict where markets will go over the short-term.
Even professionals struggle to time the market with consistent success. Sometimes we’ll get lucky and mistake that luck for skill, but we often do ourselves more harm than good.
I’ve sat in on a couple of client meetings recently, and it’s fair to say there are range of views about how to approach markets at this juncture.
Some investors are happy to stay the course, taking the view that markets will do what they do in the interim but comfortable in the knowledge that good businesses will prove their worth on a longer-term basis.
Others are more nervous, and they recall being highly uncomfortable during the March volatility. This group sees the rebound of the last few months’ as a second chance to sell.
The latter perspective is understandable. After all, virus cases are spiking in the US, the earnings season might not live up to forecasts, and we still have the US election to get past later this year.
Then again, the economic impact of the pandemic might not be as bad as expected, monetary and fiscal stimulus could offset this, or a vaccine could unexpectedly emerge.
There’s nothing wrong with de-risking your portfolio a little, but with interest rates where they are, you don’t get paid to sit on the sidelines anymore.
You also run the risk of missing out on any future gains from equity markets, in case the downturn you’re waiting for never comes or if you blink and miss it, as was the case in April.
If your longer-term objectives have changed or your asset allocation has found itself out of whack, then by all means - adjust your strategy.
But if you’re simply trying to sell high and buy low, be aware of how difficult this can be. This year has taught us that sometimes doing nothing is the most sensible strategy.
This article was also published in the New Zealand Herald on 13 July 2020 under the title of 'Mark Lister: The most important lesson 2020 has taught investors'.