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Challenges of Timing the Market

January 2019
By Nanette Abuhoff Jacobson

What happens to investors who pull out of the market because of volatility? They end up missing its best days.

 


 

Volatility is back, and many investors may be tempted to move into a 12-month US Treasury bill yielding more than 2.5% and wait for cheaper equity valuations before legging back into the market.1 While this seems like a good idea in theory, in reality timing the market is nearly impossible, and the risk of missing out on rebounds is very high.

FIGURE 1 shows the potential effect of skipping even a few of the market’s best days. Missing just 10 of the S&P 500 Index’s2 best days over the past 29 years would have reduced the ending value of an initial $100 investment by more than half.

 

 

FIGURE 1
Growth of $100 invested in the S&P 500 Index
January 1, 1990 to December 31, 2018 for entire period vs same period missing best days of performance ($)

Sources: Datastream, Wellington Management. Note: This is for illustrative purposes only and reflects the hypothetical impact of missing the best day, missing the two best days, etc. of S&P 500 Index performance over the period. Past performance is not a guarantee of future results. Indices are unmanaged and not available for direct investment.

While I expect global growth to decelerate in 2019 and volatility to stick around for a while, I believe investors should consider remaining invested in risk assets (such as equities, commodities, high-yield bonds, real estate, and currencies), but position their portfolios’ defensively and not abandon them altogether. Within equities, I suggest investors focus on the US and rotate into defensive equity sectors. Within fixed income, I suggest investors favor bank loans, which are designed to provide steady income, and are higher in a company’s capital structure than high-yield bonds, lowering the risk of default.

Investment Implications 

Consider reducing risk, but don’t abandon it. It is difficult to tactically sell equities and hope for a better entry point down the road. Consider staying invested in equities and increasing allocations to more defensive areas.

Don’t necessarily overweight fixed income relative to equities.
The US economy is still on solid footing, and two of the biggest market inhibitors, the trade war and central bank policy, can both change suddenly.

Consider fixed income over cash when reducing equity exposure. Fixed income has historically played a better diversifying role after the US Federal Reserve ends a rate-hiking cycle, as I expect to happen in the coming months.

Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds.

1 12-Month Treasury Bill yield of 2.57%, as of 1/11/19
2 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. • Loans can be difficult to value and highly illiquid; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Risk assets have a significant degree of price volatility.

The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

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