Sitting at our desks in November 2018, we could only marvel at what we expected to be the 10th straight year of positive returns for the US market. Then the market fell 9.0% in December and finished the year down 4.4%. It seemed the great “bull” market had finally petered out. But, of course, it hadn’t. The market was up 31.5% last year, with dividends included.
This performance shocked everyone, but especially those who thought they could predict the market in the short run and either reduced their allocation to US stocks or eliminated it altogether after the 2018 decline. Missing out on a $315,000 gain on a $1 million portfolio is hard to recover from. Worse, it adds to a reluctance to “compound the mistake” by getting back into stocks at much higher prices. These investors have forced themselves into a box that they won’t get out of until the market drops again by a sufficient amount (what’s that?) and then rises again by a sufficient amount (what’s that?) to convince them that it is okay to own stocks again.
Missing a one-year gain of 31.5% as a long-term investor is bad. But it could be worse. Much worse. Take a look at the chart below from the Investment Company Institute showing cash flows into and out of stock mutual funds since 2003. The first six years show a predictable pattern: investors routinely buy more stocks near market tops and sell more stocks near market bottoms.
But look at what happened after 2009: hardly any cash flows into stock mutual funds. It appears that the only meaningful net inflows occurred after the market rose 32.4% in 2013, and there have been substantial outflows since the national election in 2016.
The market is up a total of 451% since March 2009. That’s a huge opportunity cost for investors who thought they could outsmart the market (or hired advisors who thought they could), or who gave into their short-term fears at the expense of their long-term plans.
Of course, the cost varies based on the degree of mis-allocation and timing of it. We know of an advisory firm that follows many of the same investment principles that we do, and that firm automatically reduced their clients stock allocations by 10% after much of the decline from late 2007 to early 2009 had already occurred. We don’t know whether they ever replaced the allocation or, if they did, when they did and at what cost ultimately to their clients. What we do know is that they almost certainly had to apologize for what appears to have been a client retention rather than a portfolio enhancement decision.
Disciplined asset class investing means never having to say you’re sorry. That’s what we have always practiced at Equius and it applies across the board from our US and international stock allocations to our continuing commitment to small cap and value stocks. Patience and confidence win. Market timing destroys wealth.
Equius Partners, Inc. is a Registered Investment Advisor.
Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.
Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
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