Mitch on the Markets

October 7th, 2024

2024 Reminds Investors Why They Should Avoid Market Timing

Share
Subscribe

2024 Reminds Investors to Avoid Short-Term Market Timing

Large-cap U.S. stocks are back to trading around all-time highs, following a bumpy summer. Readers likely remember the steep declines experienced in August, when the S&P 500 fell -8% in just 14 trading days. One day in particular—August 5th—really shook investors, with a single-day decline that rivaled volatility last seen during the 2008 Global Financial Crisis and the 2020 Covid-19 crash. The spike in the VIX (as seen below) was close to record-setting, with the index jumping to 65.73.1

CBOE Volatility Index

Source: Federal Reserve Bank of St. Louis2

Manage Today’s Market Fluctuations

Volatility is a normal aspect of investing. However, during market downturns, you might find yourself asking, “What actions should I take?”

To assist you in navigating market fluctuations, I am offering a complimentary guide titled “Helping You Manage Market Volatility3.” It answers key questions such as:

If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
 
Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”3

At the time, I wrote a column arguing that the pullback was likely tied to a sudden shift in sentiment, not a collapse of economic fundamentals. I did not foresee a bear market and believed the selling pressure would prove temporary, and I urged investors to stay patient. About two months later, we can now see what appears to be a “w-shaped” recovery outlined in green below:

2024 Year-to-Date S&P 500 Index

Source: Federal Reserve Bank of St. Louis4

The sudden onset of downside volatility, which is almost always accompanied by worrying headlines, makes it very challenging for investors to tune out the noise and stay focused on long-term goals and investment outlooks. I completely understand that it’s not very satisfying to hear that an investor should do nothing in response to volatility.

But history suggests doing nothing is often precisely what an investor should do. Since 1980, the stock market has delivered a positive annual return 75% of the time, even with average intra-year declines of over -14%.5 It’s also crucial to note that the best days in the market often happen in very close proximity to the worst days, such that a decision to sell out of stocks after a major shock (like August 5th) can mean being whipsawed if the market rapidly recovers. We saw a textbook version of this in August and September.

Over time, long-term growth-oriented investors could see real damage to returns if they’re out of the market on big up days. In fact, missing just the 30 best days that the S&P 500 delivered over a 20-year period could mean giving up nearly all of the annualized return. To put this in dollar terms, $10,000 invested in the S&P 500 over the 20-year period ending December 29, 2023 would have grown to $63,637. If an investor missed the 30 best days, it would have grown to just $11,483.

Some investors may make the argument that going to cash doesn’t necessarily mean sacrificing too much on return in the current environment, since yields on CDs and short-term U.S. Treasurys can be around 5%. While true, adjusted for inflation the real return on cash is more like 2%, which doesn’t really compare to the S&P 500’s 26% return last year and roughly 20% return year-to-date. For investors with long-term goals of growth, there’s no comparison.

Bottom Line for Investors

In up markets, investors are often tempted to take bigger risks, perhaps over-allocating to stocks in hopes of generating big returns quickly. This decision-making framework can move an investor further out on the risk curve than they should be, and perhaps at just the wrong time. On the flip side, when volatility erupts and negative headlines swirl, investors often make knee-jerk, short-term market timing decisions. This often results in abandoning their long-term strategy—even if just ‘temporarily’—in favor of a more conservative approach.

The fact is, however, that both of the above sets of actions are different versions of short-term market timing, and both can adversely impact an investor’s long-term annualized return. As I often say, if your goals, risk tolerance, and cash flow needs have not changed in a time when the market is volatile, then your investment portfolio should likely not change, either.

To navigate these current market changes effectively, I recommend downloading our free guide, Helping You Manage Market Volatility6, which answers key questions such as:

If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!

Disclosure

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
READ PREVIOUS
Take Care Of Your Year-End Financial “To-Dos”
READ NEXT
Port Strike Impact On Prices, PCE Shows Inflation Near Target, Job Market Still Healthy

Explore Zack’s Archives

View
Mitch's Mailbox
February 5th, 2025
Tariffs, Inflation And Bond Yields
Read more
Uncategorized
February 3rd, 2025
Fed Holds Rates Steady, DeepSeek Shakes Up AI, Housing Market Strengthens
Read more
Mitch on the Markets
February 3rd, 2025
How To Think About Tariffs In 2025
Read more
Uncategorized
January 29th, 2025
Fear of Spending in Retirement
Read more
Private Client Group
January 27th, 2025
Inflation News Mostly Good, Manufacturing Rebound, Consumer Holiday Spending
Read more
Mitch on the Markets
January 27th, 2025
Investors Are Becoming More Bullish–And That Is A Warning Sign
Read more

Daily financial tips directly
from the Zacks family.

Top

Search

Contact

I'm a Private Client I'm a Financial Professional