Investors have been on quite the roller coaster over the last five years. We’ve had three bear markets – when markets go down more than 20 per cent – since 2018. Equities (like stocks) have bounced up and down more times than most of us care to count. Add in the fastest interest rate hikes in history, and you have all the ingredients for a clear-cut case of financial market volatility fatigue.
So it’s not surprising that many investors have started wondering if now might be the time to simply get out of the market altogether for a while, and head for the hills until things quiet down. After all, no one likes to see the value of their hard-earned life savings fluctuating month after month, especially when they could cash out and buy themselves a good quality bond or GIC yielding over 5 per cent.
Unfortunately, cashing out your investments with an eye towards getting back into the market when things are looking better is one of those ideas that sounds simple enough in theory, but which is actually very hard to successfully pull off. And if history teaches us anything, it’s that investors who try to time the markets almost always end up worse off than if they’d simply ridden out the inevitable storms, and left their investments well enough alone.
We’ve been here before
The way things stand at the moment, anyone could be forgiven for thinking that the news will never change its tune, and the bad times are here to stay. But the reality is, the markets almost always recover long before the newsreels and pundits turn positive. If you find yourself worrying that things will never get any better, it’s important to remind yourself of one simple fact: we’ve been here before. And the last time wasn’t even all that long ago.
Remember the early 1990s, when the last super-fast series of interest rate hikes sent both stocks and bonds into a seemingly unrecoverable tailspin? Millions of panicked investors cashed out their equity holdings at a significant loss and took their money off the table – right before the markets abruptly reversed course and went on a massive tear upwards, richly rewarding those who had the patience to hold tight.
Even the current U.S. government dysfunction, which is constantly being called unprecedented, has in fact happened several times before. In October 1973, U.S. Vice President Spiro T. Agnew walked into a Baltimore courthouse, pleaded no contest to a felony charge, and resigned his office. A few days later, President Nixon fired two of his own Attorneys General for not dismissing the Special Prosecutor who was looking into the Watergate scandal. When his third Attorney General finally carried out his order, the entire country was engulfed in a rage that didn’t subside until Nixon himself resigned the following year.
As if all that chaos wasn’t enough, that same year, the Middle East was shaken by the Fourth Arab-Israeli War between Israel, Egypt and Syria, which escalated Russian influence in the region and sent the U.S. defence alert system skyrocketing to DEFCON 3. So much for “unprecedented” political conditions.
Ten days in 20 years
But back to why it’s so hard to time the markets. Given how wildly unpredictable sudden market swings can be, it’s virtually impossible for even the most sophisticated investor to perfectly time exactly when they should get their money out, or put it back in. Over the long run, the consequences of mistiming either of those two big moves by even as little as 24 hours could be devastating.
For example, if you were faithfully invested in the market over the last 20 years, and in all that time you only missed the 10 best-performing days of those entire two decades, you still would’ve lost out on more than half of your potential return. Even more alarmingly, seven of those 10 best days happened during bear markets – precisely the time when most would-be market timers would’ve already cashed out and been sitting on the sidelines, waiting for things to get better.
Temporary declines vs. permanent gains
The bottom line is, over the past 35 years, we’ve had nine different market crises, each of which resulted in a decline in the value of equities of between 20 per cent to 57 per cent. But over that same time frame – even taking those big declines into account – the Dow Jones Industrial Average still managed to increase in value by close to 20-fold.
To put it another way: historically speaking, market declines have always been temporary, before resuming their long-term upward trend.
This article is for information purposes only. It is not intended to be financial advice, and the opinions expressed are the opinions of the author only. Past performance is not a guarantee of future results. All assumptions, opinions and estimates made by the author are subject to change without notice.
Before acting on any recommendations, consider whether they are suitable for your individual circumstances, and seek out professional advice.