Two and a half years ago as all the excitement was about impeaching US President Donald Trump over the Russian scandal, I wrote, “Will President Trump be impeached? Is the political turmoil in the US about to sink financial markets?” Jack Welch, the former CEO of General Electric, told CNBC on Wednesday that an “An impeachment proceeding would blow the market away.” Now that the House of Representatives has voted to impeach Trump, I am starting to hear from nervous clients who think that the stock market is headed for a big fall. Frequent readers of mine can probably guess what my response is to these clients. I point out that it’s impossible to time the market and history is full of people who tried and lost out. It’s also full of people who stayed fully invested and are much wealthier for it. And then I add that the lack of a trade deal with China or some Elizabeth Warren early Democratic Party primary wins will scare the market a lot more than impeaching the president. Monica Lewinsky While I have a lot of respect for Jack Welch, how does he know that impeachment hearings would “blow the market away?” Since impeachment isn’t a common event I decided to look back at the last time a US president was impeached. That was of course Bill Clinton, who went through impeachment hearings because of the Monica Lewinsky scandal. Guess what? While in the summer of 1998 the market dropped by more than 10%, which is just a normal market correction, and as I have pointed out in this space countless times is something that occurs very often. The market started moving up late summer and from December through February 1999, which was the time period when the House of Representatives voted to impeach and the Senate didn’t, the market actually continued moving higher. So if we can learn anything from recent history, it’s that Mr. Welch predication isn’t worth too much. Out of sight out of mind As I mentioned above, the phones are starting to ring form nervous clients. One of them asked me what I thought and I said that since she has a minimum of a 20-year time-horizon, trying to time the market is silly and that she should stay the course. We then went back over her long-term returns and found that because she stayed fully invested during the sub-prime crisis of ’08 when the stock market dropped more than 30%, she has more than doubled her money if you look at the account value pre-market crash. That was eye opening for her and convinced her to not panic. One of the biggest risks of trying to keep timing the market is the potential of “missing” the market. This occurs when an investor, thinking the market will go down, reallocates her investments and places them in more conservative investments. While the money is on the sidelines, the market shoots up. This means that the investor has incorrectly timed the market and “missed” the best performing months. There have been numerous studies done to illustrate how much an investor can lose by being out of the market. Michael Aloi, TheRetireGuy writes, “J.P. Morgan Asset Management’s 2019 Retirement Guide shows the impact that pulling out of the market has on a portfolio. Looking back over the 20-year period from January 1, 1999, to December 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. That’s a significant difference for only 10 days over two decades!” He continues, “You don’t have to miss many good days to feel the impact. The return went from positive to negative by missing the 20 best days of the market over 20 years. Putnam Investments found similar results by studying the data from 2003 to 2018. If you were fully invested in the S&P 500, your annualized total return was 7.7% during that time. But if you missed the 10 best days in the market, it dropped to a paltry 2.65%.” Keep in mind that the 7.7% annual return includes the market crash of ’08! How much time? Remember that short-term volatility happens all the time, and markets can and will drop. The most important aspect to determine how to react to market jitters is to figure out what your time horizon for the investment is. If you have a short to mid-term time horizon, you have no business investing heavily in stocks. If you have a seven-year or longer outlook than short-term swings shouldn’t cause worry and you should keep your eye on the long-term performance of the stock market.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il.
Source
Jesus Christ is King
Comments are closed.