We carry a relatively bad start to the year in terms of stock market investment. We were already coming off a bearish end to the year, but Russia’s invasion of Ukraine has made everything even more complicated. He adds uncertainty to the post-Covid economic recovery and this drives company valuations lower.
Some advertise that the ideal is to be out of the market and take advantage of any increase that has been recently to sell. That is, some analysts recommend trying to do market timing. And no, it’s not a good idea.
What the story says
The market is very unpredictable in the short term. Trying to beat the market there is a very bad idea. There is a study that makes it very clear. An investor decides to put 10,000 euros into the S&P500 every year, from 1978 to 2022.
The best investor is the one who manages to put the money in when the index is at its lowest for the year, and the worst investor is the one who does it when it is at its highest. The difference in profitability of both? Quite low: from 7.1% per year to 7.9% per year. Namely, even doing things perfectly right or perfectly wrong the difference is little.
Other data is also very relevant: an investor who invests in the year 2000 and withdraws his money in 2022. His return is 6.06% per year. But if he had missed the ten best days of the market (and they are 10 out of 5,000 that took place in those years) his return fell to 2.44% per year. Y if the 20 best days had been lost, the profitability was nil (0.88% per year).
In other words, there is little difference between doing good market timing and bad market timing when investing, but if we miss the key days, profitability sinks. And we already know that, although the logical thing is to buy low and sell high, humans, over and over again, do the opposite. It they say Many studies.
What could happen
Are we facing a bear market? Will the market continue to decline in the coming months? We do not know. And since we don’t know, we can stay out of the best days. Let’s imagine we exit the market on a small positive spike. But that small peak may be the first of a growing path.
It could also end the war. There could be deals. It could be that the recovery is stronger than we think, or that citizens increase their consumption for fear of inflation and companies shoot up their profits. We do not know. And being out of the market can be a bad decision.
If the idea is to invest in the long term, the logical thing is to continue with the investment plans, which should not be other than investing whenever we have available, neither more nor less. Not even spread the investment at different times to average the entry price. Investing when you have available is the best. And so wait in the end the bags will rise.