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The Folly of Market Timing
By David Chazin
Many Chevron employees started their ESIP account years ago with a few different funds and some Chevron stock and have left it alone their entire careers. On the other side of the spectrum are Chevron employees who are constantly making changes to their accounts based on market conditions.
These days, some people may have a “surefire” way to time the stock market. Just check out the Internet - you can find screens advertising market timing services. A trip to your local library will yield an equal abundance of market timing theories in books, magazines, and other periodicals. And some of these theories may or may not work.
The idea behind market timing is to buy equities when prices are low, hold onto your investment until the market peaks, and subsequently move your stock investments into cash until the market hits bottom. Then, the process begins all over again. It sounds simple enough. The problem, though, is that all timing theories are based, at least in part, on second guessing the stock market.
Different timing theories consider various “indicators” that may signal that the market is about to head up or down: margin debt, interest rates, employment data, manufacturing levels, number of advancing stocks versus number of declining stocks, and so on. However, even with the most sophisticated methods, hitting the exact highs and lows of the market is next to impossible.
What happens if your timing is off and you don’t reinvest in the market at the right time? The consequences of not being fully invested when a major market upturn occurs can be disastrous to your long-term investment plans. Studies of stock market history have shown that not being invested at the “right” times can be costly to an investor. Consider the following hypothetical example based on the return of the S&P 500:
On December 31, 1996, Susan Jones invested $10,000 in a stock index fund based on the S&P 500 Index. By December 31, 2006 the $10,000 would have grown to $22,252.00 an average annual total return of 8.33%.
However, suppose Susan decided to get out of the market periodically during that five-year period, and as a result she missed the market’s ten best single-day performances. If that were the case, her 8.33% return would have fallen to 3.32%. And if Susan missed the market’s best 20 days, that 8.33% return would have dropped to -0.46%.
Of course, the performance of an unmanaged index is not indicative of the performance of any particular investment, and it assumes no transaction costs, taxes, management fees or other expenses. It’s also not possible to invest directly in any index, and you’ve heard it before, but past performance cannot guarantee comparable future results.
The Best Defense
Market fluctuations can make almost any Chevron employee nervous, especially if you’re counting on this money to supplement your pension when you retire. But getting out of stocks when the market takes a downturn isn’t the answer. Don’t let short-term volatility drive your long-term investment planning. Your best defense against a fluctuating market is a well-diversified portfolio and a disciplined program of periodic investments.
Spreading your investments among stocks, bonds, and cash in a strategic asset allocation that takes into account your time horizon, risk tolerance, need for investment income, and long-term goals can help your portfolio produce more consistent returns, regardless of whether the stock market is up or down. When the stock market is not performing well, your returns from bond and cash investments can help supplement your stock returns.
Making regular investments in a stock or stock mutual fund when the market is down as well as when it is on the rise is a strategy known as dollar cost averaging. With dollar cost averaging, you invest a fixed amount monthly or quarterly. If you have an automatic savings plan to your ESIP, you are doing this automatically.
When the market is down, your money buys more shares. Over the long-term, the average price you pay per share generally may be lower than the average price of the stock investment during the same period. Investing regular amounts steadily over time may lower your average cost but cannot guarantee a profit or protect you from a loss in a declining market. You should also consider your ability to continue buying through periods of low prices, because effectiveness requires continuous investing regardless of fluctuating prices.
In general, investors don’t try to second-guess the financial markets. They take a structured, disciplined approach to investing that recognizes that market declines inevitably will occur.
We’d be happy to sit down with you to review whether your investment strategy makes sense and how this affects your outlook for retirement. Because we work with multiple Chevron employees and retirees, we're very knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces).
Please contact us at (925) 659-0217 with specific questions or to schedule a time to meet in our San Ramon, Point Richmond or Houston, TX offices. Also, follow us on LinkedIn.
David Chazin, Insight Wealth Strategies and Lincoln Financial Advisors Corp are not affiliated with Chevron.