Back in March 2022 we posted a blog titled ‘Time in the Market vs. Timing the Market’ which covered some research work that was previously published in 2008 and 2011. I wrote the original articles as part of a team providing research to Blue Sky Asset Management, where my Tricio colleague James Chu was a director. The research argued that missing out on the resumption of a bull trend in the FTSE All-Share after a bear market trough was a very expensive lesson in what opportunity cost means. There are plenty of articles and countless social media posts suggesting that if you can avoid the worst 9 days of losses in a bear cycle or somehow time your investments absolutely correctly you can avoid taking losses and only make gains. Good luck, would be my observation!
The idea of disappointed investors exiting the market is actually a serious consideration for wealth management firms. A big bear market can frighten investors not used to seeing equity markets fall 20% or more over a period of months and all of the negative media coverage that this brings with it. Retail investors, who are busy working and having a life, or retired and trying to plan their income streams, may be so unhappy at the losses that they exit equity markets and swear off this risk for future investments.
This refusal to commit money to stocks can last a lifetime, or it could take seeing bullish media coverage some time after a low has been made to entice some formerly reluctant investors to return to the market. As an estimate of how long it may take disappointed investors to return to the market, the Coppock indicator uses the notion of a period of mourning to guess that it takes around a year to get over the pain of a loss. So, if you sold at the lows (capitulation) then a year later you may be thinking that stocks don’t look so bad after all.
The S&P 500 Total Return charts below are a price chart and a semi-log one. The semi-log chart is used to show percentage moves which makes it easier to compare returns on a long-term basis.
One always has to be mindful of extrapolating too much from a financial market data set of course. The stock market performance since the 1980’s has been astounding in the US, as measured by the S&P 500 index. This is a market capitalization index which has a big survivor bias. This means that every quarter relatively underperforming companies are dropped out of the index and relatively outperforming shares that were not in the index are put into it. For investors this is completely different than buying individual shares in a portfolio.
We like to look at data to see if ideas hold water – or not. The chart below sums up our view that for most investors who put money to work in the market but are not active traders, time in the market is a hard investment strategy to beat. The S&P 500 Total Return index is used for this study and we look at the monthly close to keep things pretty simple and realistic for most investors.
Tricio Investment Advisors
In short, if you stuck with your investment in the S&P 500 (and earned dividends) then in every cycle since 2000 you would have made more money after 3 and 5-years than if you had waited a year after the low. This is true even over a one-year investment except for the 2022 low – where coming back into the market in 2023 (one year after the cycle low) gave a great ‘pop’ in 2024. The data tables are below, including the bear market losses seen in the down cycles. Bear markets have not been abolished – but investors need to be aware that there are opportunity costs associated with completely exiting the market.
Of course, the next bear market cycle may be different and the back of this long-term trend may be broken. A balanced portfolio (bonds) can help address some of this risk in many instances, and cash and other non-equity assets have a role to play. We are not arguing against hedging or reducing allocations to suit risk preferences. What we are pointing out is that exiting the market completely and waiting for much better news or for a period of time before coming back into equity markets, has not beaten sticking with the market from the cycle low.
Gerry Celaya
Chief Strategist
Appendix – Data Tables
The table below is the data used in the chart of returns above. The numbers in red are the returns to end of September 2024.
The table above shows the bear market falls (monthly close peak to monthly close trough), returns at set time periods from the cycle high and from the cycle low. What may be worth noting is that the 2000 fall is the only one that took longer than 5-years to regain the previous bull cycle high (2115 was reached at the close of October 2006). The 2018 cycle was included even though it was very brief, as was the Covid bear market.
The table above shows the data for investors coming back into the market one-year after the low, with the red figures showing the returns to September 2024.
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