Did You Miss A Great Year In the Markets?
When you time the markets, you miss great years.
Here are the performance numbers for major investment indices for 2019, year-to-date through December 26.
S&P 500 (Large US) 31.83%
Russell Mid Cap (Mid-sized US) 30.69%
Russell 2000 (Small US) 26.14%
MSCI EAFE (Foreign Developed) 22.24%
MSCI Emerging Markets (Foreign Emerging) 18.38%
Barclays US Aggregate 8.64%
Barclays Municipal 7.48%
MSCI US REIT 24.20%
By all accounts, this was a banner year for many asset classes. Bonds are up over 8%. But somehow, I suspect many people did not participate in this growth because of the market volatility that occurred in 2018.
The past two years will go down as great examples of how volatile markets can affect investor behavior.
Last year, 2018, was the worst year in the markets since 2008, and it all happened within the last three months of the year. Sometime around October 2018, the market started nosediving and didn’t begin a recovery until early 2019.
As a result, many investors were hesitant to invest in 2019. They were sitting on the sidelines waiting for the next crash..and waiting..and waiting… This is a classic behavioral investment mistake that we’re told never to make—Don’t Time the Market!
Now the market is much more expensive—they’ve all missed out.
Let’s look at the numbers….
Here are some pictures of ACWI, which is the iShares ETF representing global equities, and the hypothetical growth of a $10,000 investment starting at various time periods.
The first is 2018. You can see that the market peaks somewhere in early 2018, flattens out, and then dips significantly starting in October. Q4 was rough. An investor starting on January 1, 2018 would have around $9,000 on December 31, 2018—about a 10% loss.
Market Timer: “I can’t believe I picked this year to invest—I’m out!”
Here’s 2019. You can see the steady growth upwards throughout the year, with a few minor dips. Someone that invested $10,000 on January 1, 2019 would have over $12,500 today—about a 25% return.
Market Timer: “Well I can’t get back in now, I have to wait until it dips again…”
Here’s both years put together, which provides a better perspective. If our original January 1, 2018 investor stayed invested (or kept investing through the dips), they would have close to $11,500—about a 15% return in two years. Not bad.
Finally, here’s the most important chart. It’s the chart that shows how someone would have fared if they invested on the eve of the market collapse in 2008. Despite buying into the market at the very “top” in 2008, this long term buy-and-hold investor would still have nearly doubled their money by today.
Question: say you put $10,000 into the market in March of 2008, and by March 2009 you had $5,000—what would you do?
Most people would sell, and who could blame them? This chart just shows why selling is not the right move.
A good advisor will provide this perspective and hold you accountable during the time of crisis. You’re more likely to stay the course and realize that volatility is OK over a long investment horizon.
For all the people sitting on cash in 2019 waiting for the next “crash”, good luck. These charts show that crashes don’t kill investment returns over the long term-they’re more like traffic jams on a cross country journey.
An occasional traffic jam is much better than sitting on the side of the road waiting for traffic to clear because you’re too impatient to drive. You’ll never get anywhere like that.
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About the Author
Robert Dockendorff is a Vice President of Claro Advisors, LLC. Bob serves as an Advisor at Claro, where he helps clients achieve financial goals through careful analysis and the development of long-term plans that encourage consistent, achievable actions. Bob also enjoys sharing helpful financial planning insights on his blog and is an active contributor on Investopedia's Advisor Insights website.
Prior to joining Claro, Bob was a Senior Associate Financial Counselor at The Colony Group, supporting a team of financial counselors with research and analysis on all areas of wealth management and financial planning for high net worth individuals. He also focused on the implementation of investment, estate, and tax planning tailored to the specific goals of diverse clients. Prior to joining The Colony Group, Bob worked as a Tax Associate at the international accounting firm Ernst & Young, where he conducted tax research for multi-national businesses. Bob received a Bachelor of Arts in Philosophy from the University of Vermont. After college, Bob earned a Juris Doctor from Suffolk University Law School, Cum Laude, and an LL.M in Taxation from Boston University Law School. Bob has previously passed the FINRA Series 65 and the MA Life and Health Insurance Producer Exam. In his spare time, Bob enjoys the mountains, the beach, and playing golf. Bob resides in Hingham, MA with his wife Caitlin and two sons, Charlie and Tommy.