Читать книгу Ignore the Hype - Brian Perry - Страница 31

The same principal applies in the stock market. Historically, stocks have risen on approximately 53% of trading days. The stock market has declined on approximately 47% of trading days. Of course, no one knows in advance which days stocks will rise, and nearly half the time they fall in value. Yet despite that fact, it still makes sense to stay invested, because over time, the odds are in your favor.

In a perfect world, an investor would participate in the market's upside while avoiding the downside. In this state of nirvana, the investor would perfectly time their moves in and out of the markets, thereby capturing the long-term upside while avoiding ulcer-inducing declines. The blissful investor would thereby meet their financial goals in a stress- and worry-free manner.

And that is precisely the goal of market timing, whose fundamental precept is to invest when markets are rising and then move to the sidelines prior to sharp declines.

Unfortunately, successfully timing the markets is an exceptionally difficult thing to do. After all, when markets are falling, how do you know if the decline will continue for six more months or if the rebound will start tomorrow? Similarly, although selling when markets seem overvalued might make sense on the surface, overvalued markets often continue higher for months or even years on end. And when the market does eventually decline, there is no guarantee that prices will fall below the level at which you sold in the first place.

And of course, a successful approach must be repeatable. And so, the challenge facing the market timer is not simply to move into or out of the market once or twice, but rather to do so again and again over the course of years and decades. And that ability to correctly anticipate when to buy and sell across different market environments, political regimes, and economic cycles, is very rare indeed.

If there were no cost to mistiming moves in and out, then perhaps the endeavor would make more sense. After all, a high-reward, low-risk strategy would be appealing. The problem, however, is that if your movements are anything less than perfect, market timing is one of the riskiest tactics you can employ.

That statement may sound odd. After all, isn't it risky to stay invested in an overpriced market that may eventually decline in value? Wouldn't prudently sitting on the sidelines make sense?

Well, for starters let's discuss two different types of investment risk. The first, and more commonly cited, is volatility. This is the figure you might see quoted in mutual fund reports or stock analysis websites. Commonly measured as standard deviation, volatility simply describes how bumpy an investment's path has been over time. And of course, the bumpier the ride, the more uncomfortable it is to hold on. This volatility is what many market timers attempt to mitigate by moving in or out of the market.

However, there is a second type of risk that I would argue is more dangerous than volatility. I'm referring to shortfall risk, which is simply the risk that your realized investment returns fall short of the returns you require to meet your financial goals.

This risk, in my opinion, is the far more important one. Think about it this way: if you go to Disney World, the route you take to get there and any delays you face along the way may very well impact the quality of your vacation. But wouldn't a far greater measure of how good or bad the vacation is simply be this: Did you ever actually get to Disney World?

Similarly, although you certainly want to minimize the bumps you face on your journey toward financial freedom, the far more important measure of success is whether you actually achieve that freedom. And that is why moving in and out of the market, with anything less than perfect timing, is so dangerous.

Consider two investors whom we'll call Jane and Tarzan. Both Jane and Tarzan started with $100,000. Both of them invested for 20 years. And most importantly, they both held exactly the same portfolio, allocated entirely to the S&P 500.

Jane put her $100,000 to work on day one and stayed invested through thick and thin for the entirety of her two-decade time horizon.

Tarzan did exactly the same thing, but with one important distinction. Tarzan sat out of the market for two months during that two-decade time frame.

Unfortunately for Tarzan, his timing was awful and those 60 days he missed out on turned out to be the best 60 days of the whole period. What kind of an impact do you think Tarzan's poor timing would have on his total investment returns, relative to Jane's total returns?

Jane stayed the course for the entire two decades and saw her $100,000 initial investment grow fourfold. On the other hand, Figure 2.5 shows that Tarzan missed the 60 best days during that period and saw his $100,000 drop by more than 70%! Keeping in mind that there were approximately 5,000 trading days during those 20 years, the difference between participating on 100% of those trading days versus participating in 99% of those trading days was $370,000!

Figure 2.5 Growth of $100,000 Invested in S&P 500 for 20 Years

SOURCE: Analysis by Brian Perry. Returns provided by JP Morgan Asset Management with data from Bloomberg; time frame 1998–2017.

What do you think? Would an extra $370,000 one way or the other have an impact on the quality of your retirement? Again, keep in mind that Jane and Tarzan had the same time horizon and invested in exactly the same thing. The only difference was that Jane stayed the course and Tarzan did not.