Historically, the most severe market downturns followed periods of low volatility, high earnings reports, positive GDP growth and bullish sentiment.
Amid rumblings that the long-running bull market is due for a downturn, many investors may be pondering the wisdom of getting out of the markets. As tempting as this may be, consider that this is the epitome of market timing — a strategy generally discouraged for long-term investors.1
Will the market drop? When will the market drop? No one knows. We often view negative signs, like poor earnings reports, high debt-to-GDP ratios and political unrest as market indicators. However, it’s worth noting that, historically, the most severe market downturns followed periods of low volatility, high earnings reports, positive GDP growth and bullish sentiment. These “signs” all preceded market drops in 1929, 1987, 2000 and 2007.2
Clearly, a market decline can occur at any time regardless of the signs. That’s why one recommended strategy is to never leave the market at all. As illustrated by the accompanying graph, the largest stock market gains are often concentrated in just a handful of days. An investor who is not invested during those particular unpredictable days could lose big.3
Clearly, predicting a market downturn is no easy task. While the increase in volatility that began in late 2018 may spur investors to rethink their stock exposure, we believe this decision is best reviewed with a financial advisor within the context of their entire portfolio, financial objectives and timeline for achieving them.5
Consider the following tips to help avoid the perils of market timing:6
- Create a regular, automatic transfer strategy that, throughout time, helps reduce the impact of sudden price drops. This is a particularly good strategy for investors approaching retirement as it allows them to continue participating in the market while slowly transferring assets to more conservative holdings.
- Recognize that given today’s longer lifespans and corresponding retirements, it may be appropriate to retain some assets for growth potential, even if they are exposed to a prolonged market decline.
- Investors who tend to feel overly anxious when the market starts to decline may want to reconsider the risk level in their portfolio. While financial objectives are important, so is the ability to live day-to-day without constantly worrying about one’s stock portfolio. History shows that gains accrue through long-term compounding, so shifting a portfolio into a somewhat less aggressive allocation may offer the performance an investor seeks with a more appropriate level of risk for his disposition.
Safe Harbor Financial Services is a full service wealth management company whose mission is to help people create, preserve and nurture wealth; protect and conserve their life’s savings; and plan for the distribution of those savings in the most tax-efficient manner while living and at death. Our specialty is in the retirement arena, particularly on retirement and pre-retirement planning. Contact us for a complimentary consultation and we’ll review your retirement portfolio with you. Call 251-625-1226 for your no-obligation appointment or attend one of our dinner seminars by making your reservation at the same number.
This hypothetical example is for illustrative purposes only, should not be deemed a representation of past or future results and is no guarantee of return or future performance. This example does not represent any specific product or service; it is not possible to invest directly into the S&P 500. Investing involves risk, including the potential loss of principal.
1 Natasha Turak. CNBC. June 11, 2018. “The signs of a potential market crash are now appearing, asset manager warns.” https://www.cnbc.com/2018/06/11/the-signs-of-a-potential-market-crash-are-now-appearing.html. Accessed Dec. 15, 2018.
4 Chris Hogan. DaveRamsey.com. Jan. 31, 2018. “How to Avoid Costly Mistakes When the Market Is Down.” https://www.daveramsey.com/blog/how-to-avoid-costly-mistakes-when-market-is-down. Accessed Feb. 8, 2019.
Content prepared by Kara Stefan Communications and Advisors Excel for Safe Harbor Financial Services, LLC.