As 2012 drew to a close, the press coverage of the impending fiscal cliff largely muted the news of an impressive double digit annual return by the S&P 500 Stock Market Index.* As sure as the sun rises and sets, so too will the markets rise and fall. But unlike the predictability of the sun, no one person or group of people has been able to consistently forecast the market’s movements over the long haul.
Do you know what the dates below have in common?
1/2/2003, 3/13/2003, 3/17/2003, 3/24/2003, 2/27/2007,
1/17/2008, 2/5/2008, 3/11/2008, 3/18/2008, 5/10/2010,
8/4/2011, 8/8/2011, 8/9/2011, 8/10/2011, 8/11/2011,
8/18/2011, 8/23/2011, 9/21/2011, 11/9/2011, 11/30/2011
These are the dates over the past 10 years (Jan 1, 2003-Dec 31, 2012) when the S&P 500 Index posted its 10 largest daily gains (bolded) and 10 largest daily losses (not bolded). These daily gains ranged from 3.32% to 4.67% and the daily losses range from -3.02% to -6.59%. Excluded from the list are dates between 7/1/2008 and 6/30/2009 which is when the market cratered and then experienced a partial recovery. When those 12 months are considered, eight of the top ten daily gains and eight of the top ten daily losses occurred within that 12 month span.
Do you see a pattern among the dates above? Any pattern that can be identified above becomes increasingly obscured as more trading days are added. Over the 2,517 trading days (10 years) from 2003 through 2012, the S&P 500 Index finished with a gain on 54% of days, a loss on 45% of those days and 1% of days with no change. When you plot the daily market changes for a week or a month, let alone multiple years, the randomness of daily gains and losses is very noticeable. Even financial professionals cannot regularly and accurately forecast the stock market. ‘Grading the Gurus’ a recent article in Kiplinger’s reported that an eight-year study of predictions by market pundits and experts found that on average this group correctly forecasted the performance or direction of U.S stocks only 47% of the time.**
I present this information in support of the need to have a diversified portfolio that is suited to your risk tolerance and to be invested in the market on all days. In order to capture the permanent positive return of the market, one must accept the temporary negative patches. Furthermore, these data are strong evidence that you cannot correctly and consistently predict which days will be gainers or losers and then enter and exit the market accordingly. This market timing approach is more akin to gambling than investing and over the long run is a losing proposition.
At Woodward Financial Advisors in Chapel Hill, we view investments are one part of a client’s overall financial picture and work through a comprehensive planning process to develop an investment strategy to fit their needs. We approach investing the same way we view our client relationships—long term engagements. So save the gambling for a place where the person on the other side of the transaction is at least offering you a free drink and maybe a buffet.
*The S&P 500 Index is one of the most commonly followed indices and many consider it the best single gauge of U.S large companies and a representation of the U.S. stock market.
**'Grading the Gurus' by Elizabeth Ody, Kiplinger’s Personal Finance April 2013.