- Our research shows that deep market sell-offs can act almost like an overstretched rubber band that snaps back into place, driving a fast and strong recovery.
- Recession forecasting involves using robust economic data and forecast modeling to spot upcoming recessions and adjust our investment strategy accordingly.
- Once you spot a recession coming, you may want to “play defense,” which involves sidestepping the upcoming decline by moving your money into something low-risk.
- Alternatively, you may want to “play offense,” which involves embracing the upcoming decline by moving your money into something that profits when the market declines.
Trying to time the market and avoid declines is a classic mistake that costs many investors dearly.
Sure, it seems like a good concept. If it looks like stocks are overvalued or there’s an upcoming economic threat on the horizon, why not jump out now and avoid the crash?
The thinking goes like this:
“Maybe not today, maybe not tomorrow, but sometime soon the stock market just has to crash and I don’t want to be invested in stocks when it does.”
The problem is research suggests it’s very difficult for investors to correctly time the market.
And when they try, it often comes at a high cost: missing out on big gains.
Interestingly, the majority of the stock market’s gains happen during very short periods of time. Market profits aren’t evenly distributed throughout time.
In fact, the Cogent Advisor shows that since 1927, just 8.5% of the months have provided nearly 100% of the stock market’s returns.
And from their report titled, “10 Ways to Beat an Index“, investment firm Tweedy, Browne said:
“Stay as Fully Invested as Possible: Empirical research has shown that 80%–90% of investment returns have occurred in spurts that amount to 2%–7% of the total length of time of the holding period. The rest of the time, stocks’ returns have been small. With stocks, you have to be in to win.”
If you were to miss some of the best months (or even the best days) while trying to time the market, your returns could take a massive hit.
Just look at this chart from Calamos Investments which shows the enormous cost of missing just a few of the best days from the past 20 years…