The markets are going up, then down, then up, resulting in you feeling more anxious and scared. What should you do? Sell out and wait for things to calm down? Then get back in when they do? Think again lady!
Timing the market is impossible!
Frequently switching your investments or buying and selling often to try to get in and out of the market at the so called “right time” can really hurt your investment returns. Studies show that when investors do try to time the market, historical data suggests that they ratchet up risk and lower risk at just the wrong times.
Get this: from 12/31/1991- 12/31/2011, the S&P 500 index had an average annual return of 7.81%.
So if you had $10,000 at the start of this time frame and left your money fully invested, by 12/31/2011 your account would have grown to $45,032.
If, however, you tried to time the market and missed out of the 10 best trading days during that same time period, your average annual return decrease to 4.13% which equates to having only $22,474.
Instead of trying to time the market, focus your energy on finding the right asset allocation for your money based on the time frame of the goal and your risk tolerance. Asset allocation makes up about 91.5% of portfolio performance while market timing only makes up 1.8%.*
Unsure what your asset allocation needs to be? Follow this easy breezy formula for a rule of thumb for your retirement money.
Take 100 and subtract your age. Whatever is left is the amount you should invest in equity positions, i.e. stocks. The remaining amount should go into bonds and cash or more conservative investments.
So if you are 25 years old today, you should have about 75% in stocks and 25% in bonds/cash. Now remember this is only a rule of thumb and sometimes you may want and need to be more aggressive or conservative than the numbers equate to.
Call to Action
Figure out the appropriate asset allocation for you based on your goals and risk tolerance. If you need help, contact your financial professional who can help you figure out the right asset mix for you.
Source: J.P. Morgan Asset management using data from Lipper.
*Source- “Determinants of Performance,” Brinson and Beebower.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index and cannot be invested into directly. Asset allocation does not ensure a profit or protect against a loss.