10 Mistakes That Retirees Make and How to Avoid Them: Tip 8- Timing the Market

Wealth Advisor

Wealth Advisor

Mistake number eight in retirement planning is trying to time the market. While it may seem tempting to exit when the market is down and re-enter when it’s up, consistently succeeding at this is nearly impossible. Timing the market requires being right both when exiting and re-entering, and avoiding buying high and selling low.

A chart example illustrates this: In a 2002-2012 scenario, when investors followed this approach, $100,000 turned into only $229,000. In contrast, staying invested through market ups and downs resulted in growth to $484,000.

Additionally, missing the best market days can be costly. If you invested $100,000 in the S&P 500 from 2000 to 2019, missing the five best days would leave you with $214,000, while missing 25 of the best days would result in a loss down to $82,000. To increase your odds of success in retirement, it’s crucial to stick to strategies like asset allocation, diversification, and long-term investing rather than trying to time the market.

Video Transcript

So mistake number eight would be timing the market. Oftentimes we hear during down markets, maybe we should just get out of the market entirely, wait for it to bottom out and then get all the money back in.

While this may sound good in theory, it’s almost impossible to do on a consistent basis successfully. And that’s really because we have to be right twice, we have to be correct when we’re pulling out of the market.

And then most importantly, we have to be right whenever we’re putting the money back in and that we’re not putting the money back in at a higher point than we originally took it out. So if we look at this chart, so the chart on the left is showing the S and P 500 from 2002 to 2012.

The blue bars represent the inflows and outflows out of the market, whereas the red line shows the performance. So what you can see here is normal investment behavior is whenever the red line is down, meaning when the market’s down, large outflows are occurring and people are taking their money out of the market opposite.

Whenever the market tends to tick back up, people are putting money back in. So they’re quite literally doing the opposite of what you hear. Buy low and sell high. They’re doing the opposite and they’re taking their money out whenever the market’s low.

If we take a look at what does this mean? If we invested $100,000 over the same time horizon the Blue Bar shows if we were to follow those inflows and outflows, your 100,000 would have turned to 229 versus if we would have stayed in the market and rode the ups and downs along the way, your money would have grown to 484,000 in that same time period.

If so, very important that we’re staying in the market because we don’t know when these large swings are going to happen. So this next chart shows what’s the cost of missing the best days in the market.

So what this chart is showing is if you had $100,000 invested in the S and P 500 from 2000 to 2019. So you can see on the left, if you stayed invested the entire time, the 100 would have grown to 324.

If you missed the best five days, your 100 would have grown to 214. Ten days, 161,000. And if we go all the way to the right, if you missed 25 of the best days over that entire 20 year period, you would have actually lost money and your 100 would have went down to 82,000.

So very important that we do not time the market and we stick to core philosophies of asset allocation, diversification and long term investing to always increase our odds at pulling at a gain during retirement.

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Playlist

10 Mistakes That Retirees Make and How to Avoid Them

10 Mistakes That Retirees Make and How to Avoid Them: Tip 1-Underspending
10 Mistakes That Retirees Make and How to Avoid Them: Tip 2- Failing to Diversify
10 Mistakes That Retirees Make and How to Avoid Them: Tip 3- Being Too Conservative
10 Mistakes That Retirees Make and How to Avoid Them: Tip 4- Ignoring International Stocks
10 Mistakes That Retirees Make and How to Avoid Them: Tip 5-Not Addressing Inflation
10 Mistakes That Retirees Make and How to Avoid Them: Tip 6- Mismanaging Withdrawals
10 Mistakes That Retirees Make and How to Avoid Them: Tip 7- Annuities
10 Mistakes That Retirees Make and How to Avoid Them: Tip 9- Paying Too Much in Fees
10 Mistakes That Retirees Make and How to Avoid Them: Tip 10 - Relying on "Common Knowledge"

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