The first few minutes of a flight are exhilarating as the pilot throttles the plane down the runway and points its nose heavenward. A stock market recovery is fast and furious, particularly after a steep drop. If you miss the start of a recovery, you will forego substantial gains. From the March 23 low, the Dow Jones, S&P 500, and NASDAQ have climbed substantially. The NASDAQ is up 57% while the S&P 500 and Dow Jones have risen more than 45%.
Did you miss the rebound? Is it too late to get back in the market? If you liquidated your portfolio in March, should you now repurchase your stock holdings? If you’re still standing on the tarmac looking up at a soaring stock market, you can take comfort in knowing that the Dow Jones and S&P 500 are down to flat on the year.
Outside of large-cap technology stocks, most sectors are performing poorly this year. Small-cap stocks, international companies, and real estate holdings are trading in negative territory. Small-cap and real estate stocks are down more than 14% for the year.
Despite the recent rally, it’s not too late to invest in the markets, especially if you purchase a diversified portfolio of funds. It doesn’t make sense to time the market if you own a basket of funds because you will always have some sectors trading up and others trading down. It’s better to stay fully invested so you can take advantage of the long-term trend of the markets. You will miss opportunities if you regularly buy and sell your investments.
Also, markets move. Today’s winner could be tomorrow’s loser. As I mentioned, large-cap technology stocks are outperforming most sectors this year, but it hasn’t always been the case. From 2000 to 2010 the NASDAQ lost 44% while emerging markets rose 102% and small-caps were up 68%.
According to Dimensional Fund Advisors, a 60% stock and 40% bond portfolio has generated an average annual return of 8.97% since 1926. A moderately balanced portfolio of stocks and bonds has weathered 94 years of booms, busts, wars, pandemics, corrections, depressions, and recessions. And, for the brave who refuse to sell, it has produced generational wealth. A one-dollar investment in 1926 is now worth $3,350. Of course, 94 years is a long time, so what has it done lately?
A Dimensional 60/40 model is up 6.36% for the year and more than 16% for the past twelve months. For the past three, five, and ten years, it has returned more than 10% per year. On a rolling ten-year calendar, the model has never lost money. The best ten-year performance for this model started in 1982, averaging more than 17.5% per year. The worst decade started in 1929, generating a gain of .21% per year.
Rather than trying to time the market, focus on your financial plan and your personal goals. A portfolio that you own for decades based on your goals will yield better results than attempting to buy at the bottom or sell at the top.
Let time in the markets work for you and your family.
“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it, you can never get it back.” Harvey Mackay
July 21, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.