Given the increase in price volatility, investors may think that market timing during a late-stage bull market may sound like a good idea but history suggests that there is no ‘right time’ to try timing markets.
Timing the market may cost you to miss out: Figure 1 compares the annualized returns from staying fully invested in the S&P 500 over three consecutive ten-year periods. It also shows the scenarios of being invested but somehow managing to avoid the market’s ten worst days, and also missing its ten best days during those periods. From 1988 to 1997, the annualized return on an investment in the S&P 500 would have risen from 17.6% to 22.8% by avoiding the ten worst days. By contrast, missing out on the market’s ten best days would have resulted in an annualized return of 13.9%. The experience would have been even worse by missing the market’s ten best days in each of the next two decades.
Clearly, avoiding the market’s worst days would have led to much higher returns. However, it turns out that the best days and the worst days are typically clustered in the same periods. In other words, you’d have had to have been entering and exiting the market with pinpoint accuracy and high frequency. Without perfect foresight, the probability of being able to achieve this is practically zero.
Stay Invested with a Diversified Portfolio: Many investors who sell during market downturns simply monetize their paper losses and often miss buying opportunities and improved investment performance when the market recovers. Citi analysts believe the key is to have a well-diversified portfolio that can weather through market declines and yet capture the performance in a market upcycle.
Keep a Long Term Perspective: Markets tend to be more volatile in the late cycle of bull market. It is important to keep a long term perspective and not allow short term market noise to derail investors’ long term investment plans