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We’re Disciplined and Reality-Tested

We employ long-term strategies and do not react to headlines or try to time the market.  Sometimes this is referred to as a “buy and hold” investment strategy.

We’re all familiar with the adage “buy low / sell high.” Investors often do this by moving in and out of securities based on headline news and current events. Headlines that indicate that we are “headed for a bear market” may cause investors to sell stocks and move to cash. Exuberant headlines of “all-time market highs” may motivate investors to buy stock before it rises even higher.

Despite the logical appeal of “buying low and selling high” the reality is that this strategy is almost certain to lose investors’ money over time. Investing in the S&P for the 20-year period ending on 12/31/2013 would have earned an annualized 9.22%. In other words, a $10,000 initial investment would have grown to $58,352. However, by missing the five best performing days in that 20-year time period, the returns shrank to 7.00% and the $10,000 grew to only $38,710. If the investor missed the 20 best performing days, the returns were only 3.02%. Obviously, missing the best days matters.

Annualized Total Return of the S&P500 based on how many days you were out of the market

In his paper, “Black Swans and Market Timing: How Not to Generate Alpha” Javier Estrada points out that the evidence from 15 international equity markets and over 160,000 daily returns indicate that just a few outliers had a massive impact on long-term performance. On average, across all 15 markets, missing the best 10 days resulted in the portfolios becoming 50.8% less valuable than a buy and hold investment. Avoiding the worst 10 days resulted in portfolios becoming 150.4% more valuable than a passive investment. When you do the math, you find that “avoiding” the bad days saves you money but unless you buy back in during the good days, you will likely end up worse off than if you had simply remained invested. In other words, you’d have to predict the 10 days to be out of the market and the 10 days that you needed to be in the market to take full advantage of a market timing strategy. Given that 10 days represent less than 0.1% of the days considered in the average market, the odds against successful market timing are staggering.

Statistically, trying to time the market produces a negative result. We are deliberate in watching over your investment and re-balancing if necessary, but we will never react compulsively to market fluctuations.