The Motley Fool

Should You Stay Invested Throughout Market Cycles or Time the Market?

Emotions often rule investors.

Even if over the long run staying invested and continually reinvesting makes sense, our heart may say otherwise. Looking at how the Straits Times Index (SGX: ^STI) performed in 2018, how many of us would have sold in May and gone away? With the benefit of hindsight, I guess most of us would have.

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Back in end-2016, Donald Trump had just been elected president of the United States and the UK had just voted to leave the European Union. Who would have thought 2017 would be a bull run for stocks?

Towards the end of 2017, there was a wild euphoria and Bitcoin had just hit over US$19,000, the amount of analytical reports predicting a fantastic 2018 were too many to count. The fact is, the market consensus and reality could not have been more different for the past three years. Life has to be lived forwards, not backwards.

Stay invested

There was an excellent research by Morningstar Research looking back on the US stock market performance from 1997 to 2017. Investors who stayed invested for all 5,217 trading days had an annualised return of 7.2% during the time frame. By missing the ten best trading days, this return gets chopped by half to 3.5%. If you miss the 50 best trading days out of 5,217, your portfolio returns would have been an annualised negative 4.5% for 20 years. That is the cost of market timing.

Source: Morningstar 

No doubt there are some who can time the market. These people are few and far between. In fact, Warren Buffett won a US$1 million dollar bet made in 2007 against the hedge fund industry that the S&P 500 would outperform a selection of hedge funds over the course of ten years.

At the end of the day, the Straits Times Index’s performance in 2018 helps us assess our risk tolerance when investing in equities. If we are conservative, selling out is not to cut and run. It is simply reallocating our assets according to our risk preferences. I suspect you will be like me: Tolerate the short-term pain, which can be very painful, and hold on to a steady long-term mindset to achieve your financial goals.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.