Market Pullbacks, Tech Woes and Revisiting Market Timing 
By: Kevin Dombrowski
Market Update

What a difference a week can make. 

Last week, the Department of Labor announced that 137,000 new jobs were added to the US economy in September, moving the unemployment rate to 3.7%, or the lowest it has been since December 1969. Further improving matters, the average hourly earnings continued to increase to $27.24, a 2.8% jump from a year ago. Markets were calm and most analysts and investors were feeling good.

Fast forward to this past week. As of Thursday, the S&P 500 ® was down over 5% in five consecutive trading days. Making matters worse, some of the Wall Street darlings like Amazon, Google, and Netflix were down roughly 10% over the same period. So, how bad is this? It depends on who you ask. Some are saying this is a healthy pullback from some of the tech stocks that were trading at enormous premiums. Others say it’s an early sign of a market that has overheated and may result in a further slide.

What could be causing this? Many experts connect the issues at hand with rising rates and momentum concerns.

With the S&P 500 now 5% under its all-time high, is this a bad sign? The surprising truth is that a large chunk of the downward deviation was connected to just a few of the tech giants. Even though the S&P has decreased around 5% from its all-time high, many other stocks that comprise the index have already had a pull-back in 2018.  In fact, around 60% of the S&P 500 is already in what many would classify as a correction, having dropped more than 10% from 52-week highs, while roughly 25% have fallen at least 20%.  Some might suggest that as the tech giants pull-back, it brings investments back in line for future growth. 

Is it time to sell?
It is impossible to perfectly predict the markets. When you shift into or out of the market, you are making a prediction that you will buy low and sell high. This sounds like a great strategy. You’re likely even more enticed when you speak to an individual at a cocktail party who tells you they do this to perfection. Don’t buy it. In fact, many of the most skilled investors actually mistime the markets. 

With the recent market pullback, I wanted to revisit some analysis provided in March of 2018 related to market timing in order to reinforce the principle of setting a strategy, sticking to it, and avoiding the short-term noise. I think that this is especially relevant now, and if markets continue to pull back, even more so in the coming months. 

As previously published on March 17, 2018… 

Thinking about making some bold shifts to your investment strategy? Just remember, equity markets are historically up two out of every three years, and by barely mistiming market movements, you can lose out on significant returns.
To illustrate this point, consider the S&P 500 ®  and the growth of $10,000 over 20 years. If we evaluate the time period of 1998 – 2017, that $10,000 would have grown to approximately $40,135.   

But, if you miss just the five best days of that 20-year period, the growth of that money is reduced to $26,625 - over $13,000 less. If you miss the 20 best days of that 20-year period, that $10,000 only grows to $15,723.  
The worst days are just as hard to predict. There are many additional studies showing that investors actually buy high and sell low , negatively impacting their performance. Morningstar’s Investor Return calculates how a typical investor fares when responsible for buying and selling vs. a buy and hold approach. If you look at the 10-year data below, you are able to see that the average investor reaped a return of 4% annually (weighted by actual open-end fund asset levels as of 12/31/2017) whereas all investments together returned 5.5% annually.  
Creating an asset allocation that fits with your risk tolerance and time horizons, and sticking to it, may help to avoid the pitfalls of market timing and the lost returns that often accompany it. While an additional 1.5% annually may not seem like much in a given year, it’s incredibly significant over an investor’s lifetime. 
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