With the lack of good news and continued market fluctuations, some have a knee-jerk reaction to pull out of the market. Unfortunately, there also lies the trouble of timing when to get back in. In this episode of Coffee with Brendan, Brendan responds to a trending question, “How do I time the market?” but instead of predicting forward, he looks to past bear markets to illustrate why trying to time the market usually ends up costing investors money.
How a lack of good news affects the market
Review of past bear markets
How timing the market may affect your overall gains
Why buy and hold usually works best
Hi, and welcome to another edition of Coffee with Brendan. Today's episode is going to be pretty much what's on everyone's mind, which is the market. And the fact that as of today, which I'm shooting this on September 26, 2022, the S&P 500 is down about 22% year to date. And it doesn't seem to be any end in sight, just seems like the market keeps going down, down down in the big clips, you know, 1%, almost every single day it feels like. And one of the main reasons for that is that there's just a lack of good news. And all the news that's out there is very negative. And that's baked into the market. And you'll see in a moment, in the absence of good news, the market will just continue to assume that everything's bad, and we'll get the bad news. So I'm going to talk about that, talk about it as the only way that we can really talk about it, which is looking at it historically speaking, and try to answer the question that everyone has been asking, which is “I understand the market goes up, the market goes down. But when will it stop?” And “when will it actually start coming back?” And that, of course, is the trillion dollar question. And ultimately, what my clients are asking me to do is “how do I time the market?” In other words, how do I get more conservative now with my portfolio while the market keeps going down and get back into the market, and get back into the allocation that I was once in and ride the wave back up. That’s market timing 101. And that's what we'll talk about today and explain to you why it's it's a very, very difficult proposition to pull off. So let's jump in, I'll start sharing my screen here.
And we'll take a look at historical bear markets. So let's take a look at you know, everyone's talking about the idea of recession, we've talked about recession prior Coffee with Brendan's and this time is no different. So what this chart is showing is when the market has dropped when there has been a recession, and what the magnitude of the drop is and how long it takes to recover. And what you'll notice here is that if there is a recession, the market typically drops about 37%, from peak to trough. And it takes 27 months if IE, a little over two years for the market to recover. On average. Of course, there are the times when there's been a recession, but it's taken less than that there's 11 months there, there's 21 months, so on and so forth. But of course, there's always the bad times like early 2000s and 2007, 2008 when it took longer. So that's a tale of the tape. That's history. So of course, the question that most people ask me is, markets down 22 Right now, it could go down all the way to 37. If we're we have an average recession. And the second question is, we're about nine months into this big drop, and it could take 27 months, so why not pull out now sit on the sidelines for a little bit and get back into the market when things are nice and safe? Well, of course, that's much easier said than done, because the market doesn't like to cooperate with us in that way. So I'll show you what I mean by that.
If we look at this chart, what this chart is pretty much showing is that when the market goes up, and when the market goes down, it is it usually happens in very, very close in proximity. So what this is pretty much saying is that back during COVID, March of COVID, the market on one day, March 12, went down almost 11%, but the following day, it came back about 9%. Similarly, in 2011, went down a little over 6% came back a little over 4% the following day. And you can see that, you know, two days, two days, three days, 10 days that when the market take has these big drops, it typically is in short order that the market has big gains. And so that's why it's so difficult to pull this off. And this is you know, something that I've seen every single time and markets dropped this is usually a slide that's in the deck of PowerPoint slides that we get from our broker-dealer to say stay invested. Because what this is pretty much saying is that when you miss just one day or two days or three days, your rate of return over a 30-year period drops dramatically.
So this is pretty much saying that the S&P over the 30-year period between 1990 and 2021, on average is about 10% up. You missed the best day during those times, and your return almost gets cut in half, you missed two days gets cut in half again, you missed three days, it's cutting a gun cut in half again. And then when you're looking at 5, 10, and 20 days, you know, if you get out at the wrong time, and don't get back in and miss some of those big up days, your rate of return gets cut very dramatically. And that's one of the reasons why folks like myself are always telling you to sit tight stay in the market, and you'll be okay.
And this slide here kind of echoes that, you know, what this is pretty much saying is, is that, you know, if you look at the S&P 500, over the last 20 years, the markets done about 10%, average return average investor has done 5%. And why is that because market, they time the market incorrectly. And it's as simple as that, get out of the market at the wrong time, get back into the market at the right time. So of course, that's one of the reasons why I caution you in trying to time the market and get in and out of the market at the right time.
Another reason why it's so difficult is and I'll show you this in a moment here is if we look at the last time the market had this big type of drop, we're looking at 2008 2009. In over that 2008 and 2009 timeframe, the market dropped 57% in about a year and a half. And it went down pretty dramatically. So of course, the question that most people say is, well, what if I was able to get out maybe halfway down? We kind of knew the market was taking a big drop from here to here. So if I got out there, okay, great. Well, you have to be right, again, you have to get back into the market at some point on the recovery, which is lower than when you get out. So if you get out here, you would have had to get back in somewhere around here. The best time to have gotten back in was March 9, 2009. But why is it so difficult to get back into the market because this is what the headlines were actually saying at the time, I actually pulled the full story from CNN Money. And what this is pretty much saying is that all the news was negative, negative negative, you know, stocks tumbled to a new low 12-year low, the Dow was down 80 points or 1.2, the S&P lost 7%, you know, one another 1% and finished up at 676, so on and so forth. And this may ring a bell that I said this a few minutes ago. This is the same thing back in 2008/2009 that we're seeing today.
With the absence of good news, the path of least resistance is down. And that's exactly what's happening. On the flip side, though, and this is the most important piece is to the extent that you get some piece of good news, you can see a big rally. And that's what's going to, I shouldn't say that's what's going to happen. But that could very well be the case, if for whatever reason Russia decides that their mission in Ukraine is over the market would pop if the Fed doesn't raise rates as aggressively as they say they're going to that would lead to a positive rate of return.
So these are the reasons why it's so so difficult to time the market. And so that's why, you know, when a client sends us an email, like I got over the weekend and says, you know, should we be doing something at this point? The answer is no, you know, you've taken a big hit. And the risk you run is getting out of the market, and then getting back in after the market has recovered a little bit.
But there's no green light to say, we're on the path to recovery. And this is a time to get in. So again, I wish I had better news for you. I wish I could say that there's some kind of secret sauce that we get out of the market at the right time we get back into the market at the right time. That's just not a game that wins. You know, as I mentioned earlier, you know, typically that buy and hold staying in the market, riding the wave when the market goes down. The market historically has always come back even in some of the worst of times. So there's my pep talk slash setting expectations message for you today. Of course, if you have any questions where you want to talk about your specific portfolio, I'm more than happy to talk about it. So hopefully this was helpful and we'll see you next time.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
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