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A Picture Worth a Thousand Words

by Bill Mulvahill, CFP® CPA

I came across a fantastic visual from Dimension Funds this past week. It captures, perhaps better than any other visual, why you should never bail out of the market during periods of volatility.

When sentiment inevitably shifts and the headlines are filled with gloom, it's only natural to think, "How can I avoid this? How can I protect my hard-earned savings?".

But timing the market rarely works. In order to successfully pull it off, you need to get three decisions correct:

  • When to sell
  • How much to sell
  • When to buy

This is a high-wire act that, in practice, is nearly impossible to pull off. Many try, but almost all fail. This is why the average investor achieved annualized returns of only 2.9% from 2001 through 2020, when the S&P 500 returned 7.5% and a 60/40 portfolio returned 6.4%. We all suffer from "do-something-syndrome".

Look closely at the visual above, which shows historical bull and bear markets going back to 1926, and let it simmer. Keep in mind that most of us have time horizons that extend decades. Even upon retirement, you are likely dealing with a 30 to 40 year period of time, during which your portfolio must not only provide an income stream that lasts, but also one that grows enough to combat inflation. If you plan on leaving a legacy for your children and grandchildren, your time horizon is even longer. 

With that in mind, why would you ever risk missing out on the "blue" bull markets?

Step back and have perspective before making decisions.

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