Volatility often tempts investors to time the market, which refers to trying to predict short-term price movements to buy or sell investments accordingly. Many investors seek to hoard cash and search for the perfect moment to invest. We are of the view that time in the market far outweighs attempting to time markets, as market timing can be a costly mistake.
Furthermore, investors should always have a disciplined equity portfolio re-balancing strategy to ensure their exposure is not overly concentrated in one segment of the stock market.
1.) There is a Cost to Timing the Market
Investors that think they can navigate markets through short-term buying and selling are doing so at the expense of long-term wealth generation. Often, the best days in the market occur during periods of market volatility. Missing the best days in the market proves costly for long-term returns.
Consider the twenty-year time period from January 2003 through December 2022. A long-term investor who started with $100,000 in the S&P 500 in January 2003 would have seen their savings grow to $648,440 by December 2022.
Conversely, a market timer who missed just the best 10 days during that twenty-year time period would have generated less than half of the returns than if they had stayed invested over the whole period.
2.) Implement a Dollar-Cost Averaging Strategy with Cash
Cash has historically been a losing strategy versus stocks. According to Morningstar, there are very low odds of cash outperforming the stock market over long periods of time.
Those with excess cash on the sidelines and a long-term horizon would benefit from a dollar-cost averaging strategy. Dollar-cost averaging is a disciplined method of investing in the stock market, especially for those who have concerns about stock market investing. It is the practice of investing a fixed amount of cash into the stock market at a regular frequency, regardless of market conditions. A good example of this in practice is contributing a portion of your paycheck to your 401(k) or IRA each month.
Utilizing a dollar-cost averaging strategy helps investors:
Enforce disciplined investing habits,
Remove emotion from the equation,
Bolster their diversification, as cash can be used to purchase underweight areas of their equity portfolio, and
Avoid the temptation to time the market.
At RISE Investments, we embrace the dollar-cost averaging approach for our clients when adding to equity positions.
3.) Consider Re-balancing
Investors that are overexposed to one segment of the stock market should always consider re-balancing.
Up until very recently, the performance of the market-cap weighted S&P 500 index was being driven by a narrow group of mega-sized stocks known as the “Magnificent 7”. Meanwhile, the median stock in the index (i.e. the equal weighted S&P 500) underperformed. Due to their outperformance, Magnificent 7 stocks and the market-cap weighted S&P 500 have become much larger portions of many investor portfolios.
According to Lyrical Asset Management, last year’s narrowness in market breadth approached the highest in a generation, as defined by the 3-month relative performance periods of the market-cap weighted S&P 500 versus the equal-weighted S&P 500. Historically, when the market-cap weighted S&P 500 outperforms the equal-weighted by such a margin, the subsequent 1, 3, and 5-year time periods favor diversifying into the equal-weighted S&P 500.
Furthermore, during the same time periods of narrow market breadth, owning the cheapest quintile of stocks (i.e. value stocks) has historically led to greater future outperformance versus the market-weighted S&P 500.
Over the past handful of months, Vince and I have taken active measures to re-balance our client’s equity allocations into equal-weighted S&P 500 and value strategies. We have conviction that this disciplined approach benefits our clients by reducing overall risk while also bolstering future potential returns.
Conclusion
Investing in the stock market may seem tedious, especially when market volatility is heightened. However, success can be drastically improved by putting three portfolio management tips into practice - staying invested, dollar-cost averaging, and disciplined portfolio re-balancing.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any historical returns, expected returns, or projections are provided for informational purposes only. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information.