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CPWM Market Update – 3/26/2020

Recently, market reactions have been fast and volatile. As the markets adjust to rapidly changing information and news, volatility has reached historic proportions. The lure of trying to time the market may tempt even long-term investors, but it is extremely difficult to outguess the markets with any precision or consistency.

In the last 10 trading days, we have experienced some of the wildest trading days in the market’s history. Since 1896 the fourth largest daily percentage increase for the Dow Jones Industrial Average was recorded on March 24th (+11.37%), while the second largest percentage drop happened just a few days before that, on March 16th (-12.93%)1.

Trying to make buy or sell decisions based on short-term fluctuations, however, can create an extremely uncomfortable investment experience over time. Professor Robert Merton, a Nobel laureate, said it well in a recent interview:

“Timing markets is the dream of everybody. Suppose I could verify that I’m a .700 hitter in calling market turns. That’s pretty good; you’d hire me right away. But to be a good market timer, you’ve got to do it twice. What if the chances of me getting it right were independent each time? They’re not. But if they were, that’s 0.7 times 0.7. That’s less than 50-50. So, market timing is horribly difficult to do.”

Throughout history, investors have been rewarded for not only staying invested, but unemotionally rebalancing when markets go both up and down. Attempting to find that “perfect” day to rebalance is difficult, if not impossible. Especially after sharp market pull-backs, like the last two months, investors may have the urge to wait until the market “hits bottom” before making their rebalancing moves. Of course, no one will know when bottom will occur or if it has already occurred until months/years later. However, we do know that markets have historically rallied back strongly from sharp declines. For example, with hindsight, we now know that the global stock market hit bottom in March of 2009 during the global financial crisis. While those investors who luckily timed the bottom enjoyed an extraordinary return, any investor who moved into stocks in the months around the bottom were rewarded significantly as well. Investors who moved into global stocks, within three months before or three months after the bottom, would have seen their money double five years later (1.9x to 2.1x). If you timed the bottom exactly, your investment would have been 2.4x five years later, but we would attribute that more to luck than to skill. Investors who continued to wait months and months passed March of 2009 saw diminished returns in the subsequent five years (1.6x return for a Sept 2009 starting point). While we will not know with certainty when this current market finds bottom and the recovery begins until well into the future, we believe this is a good opening for clients to rebalance if they have the risk capacity to invest capital for the long-term.

We also want to highlight the power of staying invested and the danger of trying to time markets.      

The chart below illustrates investment results since 1970 for clients who were out of the market during key performance days. While we have seen some historically bad days in the market in recent weeks, missing the rally days can have a dramatic effect on long-term performance.

The positive news is that investors don’t need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By focusing on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) investors can better position themselves to make the most of what capital markets have to offer.

As a reminder, we are here to help and available for questions anytime.


1 “Sizzlers and Fizzlers”