In this video, Matt Blocki talks about long-term investing, emphasizes the importance of sticking to a well-planned investment strategy and avoiding market timing. He points out that market volatility is a common occurrence, with annual drops of 13% to 14% in U.S. equities. However, over the last 40 years, most years with drops still ended positively.
The main risk isn’t the portfolio dropping but having the right plan in place for such events and having reserves for immediate financial needs. Market timing, trying to predict when to enter and exit the market, is discouraged because it requires getting the timing right twice and statistically, markets are up 75% of the time.
Blocki uses the analogy of a casino, where the house always wins in the long run, and staying invested in the market is like being the house. He illustrates the impact of missing the best days in the market on investment returns, highlighting the significant losses it can cause.
Instead of market timing, he recommends strategies like asset location diversification and having appropriate safeguards in place. The key takeaway is that a well-structured investment plan is essential to navigate market volatility successfully.
Matt Blocki with EWA. Today we’re talking about sticking to a long -term plan, avoiding short -term noise, and how to navigate market volatility. Inevitably during a given year, we’re expecting to see between 13% to 14% of a drop if you’re invested in U .S.
equities. Over the last 40 years specifically, there has been an average of a 14% drop that’s occurred, and 75% of those years have still ended up in very positive years, but sometimes you have to see the bad times to then enjoy the good time.
So, the greatest risk when dealing with market volatility is not the portfolio dropping. Do we have the right plan in place when the portfolio drops? Are you dependent on just that, or do we have a reserve in place if you need money? That’s not dependent on that, so we can actually let and see that money recover.
Assuming that that is the case, market timing is sometimes a question we receive and something we always recommend against. And the reason we recommend against it is if you are in the market and it drops and we get out, we’re going to feel really good as the market continues to go down, but then the question is when do we get back in?
And so, to market time, it’s not about did we time it right once, we have to time it right twice. And statistically, the equity markets are up 75% of the time and are down 25% of the time. So, this is like playing a casino game where we only have a 25% chance of winning.
So, as we’re waiting, if we don’t get the money back until here, we felt really good while the market was down, but now we actually ended up, our net return was a major loss because we missed that appreciation right there. So, again, a good plan can always get you through a bad time, but I want to monetize what this mistake could cost you.
What this mistake has costed a lot of people that try to market time or say to themselves, this time is different. Every time is different, but what’s not different is statistics and good investment principles. And I use the analogy of a casino. A casino always wins if you play long enough, right?
The house always wins. So, the casino, the odds are tilted in their favor in most games between 1% to 5%. In the stock market, it’s a 75% win, 25% loss ratio. The best thing is to stay in. If you stay in, you’re the house, you’re always going to win as long as you have a plan that allows time to be on your side.
To monetize this mistake, so $100 ,000 invested in the S &P 500 over the last 20 years, this is specifically from 2000 through 2019, this includes 2001, 2002, the tech bust, this includes 2008, the financial crisis. Regardless of that, the 100 ,000 have left alone for that 20 -year period would have ended up with $324 ,000 at the end.
Now, if you missed just the best 5 days out of that entire 20 years, your returns were cut down by more than $100 ,000. Instead of $324 ,000, now you only have $214 ,000. If you missed the best 25 days, your actual returns were negative. Your 100 ,000 would have actually dropped to $82 ,000, even over a 20 -year period, just missing the best 25 days.
Market timing is very talked about, but it’s something we recommend to steer clear of at all costs. The results will most likely be negative, if not one time, if it’s a habit you develop, it will come back and bite you. Instead, we recommend things like asset location diversification, having the right fail safes in place.
Again, a good plan can get you through a bad time. We look forward to making sure that your plan is built to sustain any kind of market volatility that is to come.
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