Listen to On the Minds of Investors
A key behavioral misstep investors should always avoid is trying to time the market, and 2020 showed just how detrimental timing the market could be for investors even in the short term. Our Guide to Retirement outlines the impact of missing out on the best days in the markets, comparing the returns of a $10,000 investment in the S&P 500 over the past 20 years, which clearly highlight the benefits of avoiding the temptation to pull out of the market and risk missing the days with greatest gains.
If we look at market swings in recent times however, from 2000-2019 saw six of the best days occur within two weeks of the worst days. This trend has been even more pronounced in the COVID-19 impacted markets of 2020, this number has risen to seven, with five of those best days occurring within just one week of a worst day. From a performance perspective, as highlighted, not being involved for just a handful of important days last year could’ve drastically changed investor outcomes. In 2020, missing the 5 best days of the S&P this year would have left the index down -18%. With those days, the index was up over 18%, a 35 point difference. Overwhelmingly the worst days occur BEFORE the best days, meaning it’s highly unlikely for an investor to have the courage to re-invest in the market in time if they’ve pulled out after experiencing a poor return.
Another consideration should be tax implications. While it is reasonable to expect an increase in individual taxes for high wage earners over the next few years given the rise in the nation’s debt, just as we don’t put all of our money into one asset class we shouldn’t save and invest all of our money in the same tax-type account when planning for retirement.
When saving for retirement, having healthy income tax diversification through taxable, tax-deferred and tax-free (Roth) contributions provides greater flexibility in retirement when constructing a retirement income plan. In planning ahead, savers should calculate how concentrated you may be in tax-deferred assets. If over-concentrated, you could end with a chunk of your Social Security benefits subject to income taxes and potentially extra premiums for Medicare coverage in retirement. If that’s the case, talk to your financial professional and tax advisor about saving into a Roth option or converting a portion to achieve healthier diversification.
In addition, consider the TCJA’s relatively low federal tax brackets that will sunset after 2025 – this creates a window to both contribute and potentially convert tax deferred assets at a lower cost. Overall, when saving for a long term goal such as retirement, savers should not try to time the market and consider seek professional help in implementing an efficient tax scheme over their investment horizon. Together, investors can avoid several mistakes on the road to retirement.
Impact of timing the market in 2020
S&P 500 total return, Jan. 1, 2020 = 100