Why Time in the Market Is Your Best Ally

Why Time in the Market Is Your Best Ally

by Brandon Miller on Nov 6, 2020

Financial Markets, Investments, Taxes

There was an Anne Fizzard cartoon in The New Yorker the other week that showed a man suspended in a pod while his wife tells a friend that after voting early, he wanted to be “cryogenically frozen until Inauguration Day.”

Lots of us can relate to that wish. What a fantasy to be able to go into suspended animation and wake up when this pandemic and all the chaos it has caused go away.

Many people have a similar type of feeling when it comes to the stock market. I’ve had clients ask if it wouldn’t be better to get out for now, park their money in something safe like a money market account, and then return to stocks when things aren’t so volatile.

In a word, no. And I have the numbers to back up that very strong opinion.

J.P. Morgan Asset Management looked at rate of return (ROR) for the S&P 500 for the past two decades, from January 3, 2000, to December 31, 2019.* People who stayed in the market that whole time got a ROR of 6.06%. Not spectacular, but it does turn a $10,000 investment into over $32,000.

Now imagine that you were invested for all but the 10 best market days during that same period. Missing just that small amount of time drops your return down to 2.44%. So that same $10k is now worth half as much, just a little over $16k. Sit out a whole month of the best days and your ROR is now in negative territory, shrinking a $10k investment to just $6,749.

Need even more evidence? The worst trading day of 2015 and the best one happened on August 24 and 26—just two days apart. So no, getting out of the market even for a little bit probably isn’t your best move.

You may not think of a temporary exit as market timing, but that’s exactly what it is. And as you may have heard, leaving when things are bad and coming back when the market is on fire again is the exact opposite of what the big guys like Warren Buffet do. What’s more, we have no idea how much longer or in what new ways COVID and its aftereffects are going to upend our routines and fuel market volatility.

This ongoing uncertainty is worrisome on so many levels, especially when we’re talking about your hard-earned money. So, it might relieve some of your anxiety to look at five factors that have the most influence on building wealth, in order of importance.

1) Time in the Market

As an investor, you’ll find no better friend. That’s because of the magic of compounding. Simple math makes every $1 you invest today potentially worth double, triple, or more in years to come.

Here’s how it works: At the end of each compounding period, you get paid interest on your principal. The next compounding period, you earn interest on both your original principal and the interest you earned in the previous period (assuming you don’t withdraw anything; see factor 2). And so it goes earning interest on interest such that your money grows exponentially. The longer it has to grow, the greater the amplification of your original investment amount.

2) Money In/Money Out

Keep adding to your investment and it will grow even faster thanks again to compounding. But withdrawing money lessens the amount earning interest and some of your compounding advantage.

3) Taxes

A high tax burden can eat into your earnings, and thus, your wealth. But there are tax-advantaged investments and strategies that you can use to help even things out.

4) Asset Allocation

Surprised this is so far down the list? It’s still important, but we believe how you shift around the pieces of the pie contributes to your wealth less than the previous factors.

5) Individual Investments

And, finally, we get down to whether this stock or that one, this fund or that bond is best for you.

Viewed this way, you may feel less anxious about getting in on the next great thing and more invested (literally and figuratively) in putting away as much money now as you possibly can. It sure seems like a better option than relying on suspended animation to wake up to a brighter future.

*Source: J.P. Morgan Asset Management analysis using data from Bloomberg. The hypothetical performance calculations reflect the reinvestment of all dividends and are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown.

Rate of Return (ROR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities. An index is unmanaged and not available for direct investment, and does not reflect advisory fees, any of the costs associated with buying and selling individual securities, or any other fees, expenses, or charges. Past performance does not guarantee future results.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Brio Financial Group is a registered investment adviser. SEC Registration does not constitute an endorsement of Brio by the SEC nor does it indicate that Brio has attained a particular level of skill or ability. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.

Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.