< Back to posts

The Cost of Guessing

Published by: Nathan Smith Date: April 01, 2020

As the market continues to digest the incoming economic toll of the Covid-19 crisis, we firmly entered bear market territory (down 20%) in the S&P 500 on March 12, 2020. The market continues to trade on future expectations from news on the ground about the virus effects on the global and local economy and from the effects of stimulus measures that are being conducted by both the Federal Reserve and the U.S. legislature. Last week the S&P 500 had its best three day rally since 1938 in anticipation of the CARES Act that was signed into law on Friday.

The daily volatility in the markets has been nothing short of nauseating, and reminds me of how the markets traded during the last bear market in 2008-2009. The headlines during that time created incredible rallies over just a few days. The chart below details the number of bounces over a four month period during the first half of the Great Recession.

As we enter the first month of this bear market, already it is showing bounces that are similar to the past. The S&P 500 has seen two bounces of 9% and 18% in just a few trading days, and have some investors thinking that the worst could be behind us. That certainly could be a possibility, but given the uncertainty around the spread of the virus and more states coming under mandatory quarantine orders it seems more likely that we will continue to trade in large ranges until we gain more clarity on the economic effects of the crisis. For those investors trying to time the bottom of the market or that are trying to trim risk assets after a few positive days, keep in mind that missing the best days of market performance can have a dramatic effect on your portfolios performance over the long-term.

Attempting to trade in and out market during volatile times has shown to be a poor strategy for generating returns. As illustrated above, missing just a few key days can leave us in far worse shape than if we stay invested and rebalanced as opportunities arise. Having a plan with a pre-defined target allocation for our clients allows us to take emotion out of the equation and incrementally buy more when specific investments become less expensive. This systematic process is crucial in periods of uncertainty in order to help clients adjust based on price rather than trading on the headlines of the day. While timing the market is virtually impossible, capturing returns is simple and only requires patience, a trait possessed by all great investors.