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The VLP Live Greater View: Time in the Market, Not Market Timing

January 24, 2023
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2022 will likely be remembered as one of the most volatile years for investors as the S&P 500 experienced its worst performance since 2008. Of the 251 trading days in 2022, just five trading sessions accounted for more than 95% of the S&P 500’s decline of 19.44%. These have been described as the “five days that killed the year” of which two were caused by disappointing inflation data, and the others triggered by weak corporate earnings and commentary from Federal Reserve Chairman Jerome Powell.

Conversely, without the five best trading days in 2022, the loss would have been 68% worse, leaving the index with an overall return of -32.3% for year. These five days were scattered across May, June, October, and November, and would have demanded impeccable timing to invest at each low entry point.

This may prompt one to ask: When is the best time to invest in a particularly volatile market? Empirical evidence has shown how terribly difficult it can be to correctly time the highs and lows in an unpredictable market (i.e., daily moves that exceed +/- 1%). Research has also demonstrated that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing. Since timing the market is nearly impossible, the best strategy for most investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible, especially if your goal is to invest for the long-term.

Below is a graphical representation which shows how much hypothetical wealth five investors had accumulated at the end of a 20-year period (2001-2020). Each investor received $2,000 at the beginning of every year for the 20 years ending in 2020 and left the money in the stock market, as represented by the S&P 500 Index (while it is strongly recommended one diversifies their portfolio with a mix of assets appropriate to their own goals and risk tolerance, this focuses on stocks to illustrate the impact of market timing).

Source: Schwab Center for Financial Research. Invested $2,000 annually in a hypothetical portfolio that tracks the S&P 500® Index from 2001-2020. The individual who never bought stocks in the example invested in a hypothetical portfolio that tracks the lbbotson U.S. 30-day Treasury Bill Index. Perfect timing was able to place $2,000 into the market every year at the lowest closing point, while bad timing invested each year at market peak. Invest immediately added to the markets the first trading day of year, and dollar cost averaging divided the investments into 12 equal portions.

What this means for an investor is that if you're not sure when to invest in your portfolio (e.g., wait for a "better" time or dribble your investment out evenly over the year), the best bet is to be decisive. Create an appropriate plan and take action on that plan once in place. It's nearly impossible to accurately identify market bottoms on a regular basis. So, a long-term investor should instead determine how much exposure to the stock market is appropriate for their goals and risk tolerance and then consider investing as soon as possible, regardless of the current level of the stock market.

If you are not confident in your portfolio positioning or would like us to review your current approach to investing, please reach out to us! Conveniently schedule time with one of our advisors here: Schedule a Meeting.

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Disclosure: Investment in mutual funds is subject to risk and loss of principal.  There is no assurance or certainty that any investment strategy will be successful in meeting its objectives. Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds. Contact our office at 8391 Old Courthouse Rd. Ste. 203 Vienna, VA 22182 or (703) 356-4360 to obtain a prospectus, which should be read carefully before investing or sending money.

The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost.

Because dollar cost averaging involves continuous investment in securities regardless of fluctuating prices, the investor should consider his or her financial ability to continue purchases through periods of falling prices, when the value of their investments may be declining. Dollar cost averaging does not ensure a profit or protect against loss.