Market Forces2

When Times Are Turbulent – Invest and Relax

Market Forces2

No doubt the recent volatility in the market place has investors unnerved. Friends, family, neighbors, work colleagues, are all giving their opinion on where we stand and what will happen in the near future. Unfortunately, no single individual knows exactly what is going to happen next so deciding to make a change to your financial plan should be tamed.

But it is not easy. This is real money with real lives on the line. It may seem easy to sit back and say, "hey, it's gonna be ok," but some investors need more than just a simple sentence. Enter Index Fund Advisors and the IFA Wealth Advisor.

We value the privilege and honor in helping clients with their financial affairs. Since the beginning, our business has been to provide financial advice based on sound empirical evidence, with world-class service, and an unwavering commitment to do what is in our clients’ best interest. It is a relationship beyond a simple handshake. Giving independent advice free of conflicts of interest and being there for our clients when times get tough is what makes us get up and go to work everyday. And the proof is in the pudding.

We recently published an internal study about the performance of our own clients during the most recent financial debacle. The difference in performance between the clients who stayed the course and those that decided to change their portfolio (timing the market) is staggering. As you can see, we weren't perfect. There were some clients who decided to make a change near the bottom of the market. We created this study to educate ourselves and our clients (with actual results) to further cement our philosophy in buying, holding, and rebalancing a globally diversified portfolio of index funds.

Below is a video that we produced that aims to educate clients on the perils of trying to time the market. You can also find a wealth of information in Step 4 in our 12-Step Program for Active Investors.

While many investors may think that they will just wait on the sidelines until "things calm down," more often than not they miss out on the subsequent rebound, thus locking in their losses. And the act itself is much harder than the media portrays. In fact, most well-cited professionals have had a less than sparkling track-record in terms of being able to make the right call. Nobel Laureate, William Sharpe, once estimated that a professional market timer would need to be about 74% accurate in their predictions in order to beat a simple buy-and-hold strategy. Thanks to CXO Advisory, we can actually track the historical record of 28 well-known active market timers. We have presented the results in the chart below.

Not a single professional came close to the 74% success rate needed. Further, more than half of the managers shown did worse than flipping a fair coin. Again, while the media may highlight one manager being able to make the right call after the fact, there is no information that we can reliably use to profit from it. The odds are stacked incredibly high against you.

Market timing is essentially a guessing game of trying to predict future events, which as we know is impossible. Past performance is not even a reliable indicator of future events. While many investors may believe in “reversion to the mean” or some similar notion, market fluctuations are random at best. For example, market performance in one month tells us nothing in terms of what the performance in the subsequent month is going to be. The scatterplot below shows the relationship between the monthly return for the S&P 500 and its subsequent monthly return, including a regression line of best fit. As you can see, we see a correlation of virtually zero (0.008). We would like to see a correlation of plus/minus 1.0 to indicate a strong relationship between the two months. This relationship holds true whether we are looking at daily, monthly, annually, 2-Year, 5-Year, and even 10-Year averages. You can find more information here.

If you are still feeling the itch to make a change to your portfolio, give your IFA Wealth Advisor a phone call. We will make sure that we answer any and all questions that you have, use charts, videos, and articles to illustrate our advice and course of action (or inaction), and make sure you have confidence in your path forward - so you can invest and relax.