Many investors are sitting on a large pile of cash, waiting for a market decline to get invested. Stock returns have been good the last 9 years (that’s what stocks do), and investors think if they invest now they’ll lose a ton in the next bear market (which they’ve believed for a long time is right around the corner).
I always ask: How much have you lost so far?
No one gets this question correct right away. Stocks are at all-time highs so the assumption is that no one has lost anything yet. But that’s not true. If you’ve been sitting in cash, waiting for a market decline, you’ve missed out on huge gains. You don’t have what you should have just by sitting tight and not trying to time the market. Missing out on positive returns is no different than losing money when stocks decline—you have less than you should have (or once had). By trying to avoid bear market losses, you just sustained bull market losses. The difference, of course, is that all bear markets have been temporary. Most bull market advances have never been revisited, even in the depths of market declines.
So how much have you lost so far? The way to figure it out is to multiply the amount you’re holding in cash (beyond what a sensible long-term plan would call for) by the amount of return you’ve missed for the time you’ve held too much cash. Here is a chart showing you the cumulative returns on a globally-diversified stock portfolio* over various periods of time through October:
Here are a few examples:
- Let’s say you sold off 50% of your stock allocation last year right before the election, worried that political turmoil would cause your portfolio to plunge. You’re in a correction (a loss of at least 10%) — you’ve missed 11.7% in returns so far (50% of 23.4%).
- Five years ago, you decided to take a modest 30% of your allocation out of stocks because we had seen several years of gains, you thought interest rates would rise, everyone said stock valuations were too high, etc. You’re in a bear market (a loss of at least 20%) — you’ve missed 25.4% in returns so far (30% of 84.6%).
- Eight years ago, you shifted 40% out of stocks after a strong bear market recovery because various market prognosticators were forecasting "lower expected returns" on stocks. You've sustained Great Depression-like losses of -65%!
This is why market timing -- not investment expenses or even taxes -- is the single biggest risk and cost in investing. Missing out on the upward trajectory of a diversified stock portfolio — even when gains aren't expected — can cost you many multiples of what you pay over your lifetime in ongoing expenses, taxes, or advisory fees. And yet many investors, even very smart and experienced ones, pay the costs I’ve outlined and more.
How much have you lost so far? My hope is nothing, but my experience is that it's a lot more than you should have, or can afford to.
*DFA Equity Balanced Strategy
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.