The REAL Cost of Poorly Timing the Market
I hate the term “learning experience” when it comes to investing mistakes. The cost is too high. This term was thrown around a lot this past summer and fall as the market rebounded from the March lows and started to make all-time highs again. Market pundits described the event of investors selling at or near the bottom and buying again much later at higher prices as a simple “learning experience” to hopefully never be repeated again. The reality is that just one of these “experiences,” especially in retirement, has significant costs. To be clear, I’m not talking about individuals who get unlucky, such as the The Worst Market Timer I wrote about last week. I’m talking about someone who tries to outsmart the market and gets punished for it.
If you had a 60/40 portfolio, 60% S&P 500 and 40% Bond Aggregate Index, worth $1,000,000 at the top of the market, you would have had about $800,000 near the bottom on March 23rd.
To be fair, I did not hear of many people selling at the very bottom. However, in the weeks after, the market recovered significantly, while the pandemic was still getting worse. This is when some started thinking it was a good time to get out before the pandemic got worse. At this point in time there were only 2.8M confirmed cases and as of this writing there are 76M so it was fair to assume that the worst of the pandemic was still in front of us.
So, giving them the benefit of the doubt, let’s say they sold a month after the bottom on April 23rd, at only an 8% loss.
There $1,000,000 would now be worth $920,000 (an 8% loss). Now let’s say they continued to watch the market rebound while the virus got worse and finally got the courage to get back in when the Pfizer drug was submitted for approval to the FDA around November 20th. At this point in time, it was reasonable to assume the vaccine would be approved and high-risk individuals might start receiving it this winter. If the original $1,000,000 would have been invested from start to finish (November 20th), it would be up roughly 7%, worth $1,070,000.
Instead, they are left with $920,000, a difference of $150,000. Now you might be tempted to chalk this up as a $150,000 lesson, but that is farthest from the truth. If they are 60 years old and live another 30 years, invested in the same 60/40 portfolio, and never make a mistake again, their $920,000 will be worth $1.8M if we assume 7% growth and an annual withdrawal of $40,000 (increased by 2.5% per year). If that same investor had not sold, their $1,070,000 would turn into $2.8M over 30 years with the same assumptions. The difference? A whopping $1,000,000. That “$150,000” learning experience hurts a little more now.
I love planning around investment and tax optimization – but these tweaks become almost irrelevant if the investment plan is not followed consistently over long periods of time. This is why I stress establishing a written financial plan that supports an investment plan, which includes both good and bad markets – and then sticking to it.
If you did make this mistake or have in the past, you’re in good company. There are very few who can honestly say they have never made an emotional investment mistake. I hope this gives you the courage to develop an investment plan you are comfortable with and then stay the course going forward.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.