Returns in the stock market have been relatively flat for the past year, but investors often become alarmed at the day-to-day volatility, which result in large spikes or losses in the S&P 500 or Dow Jones indexes.
Instead of believing that they need to sell or buy certain stocks to generate better returns, investors should “stay the course” and remain in the market by continuing to dollar cost average into their existing mutual funds or ETFs, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
Attempting to time the market can be a fool’s errand, because few people can determine the exact time to buy or sell certain stocks or when to get in or out of the market. The result is often disastrous with some people losing even more money than they had intended.
“It dooms the investor to failure,” Johndon said.
In 2014, JPMorgan Chase found in a study that the S&P 500 returned 9.22% compounded annually from 1993 through 2013. If an investor got out of the market and missed the ten best days out of approximately 5,000 trading days, the return fell to 5.49%. Missing the 20 best days meant the return was 3.02%, approximating inflation.
Trying to chase “winning” stocks can often lead to a path, where the losses are greater than the gains for long periods of time, said Bijan Golkar, CEO of FPC Investment Advisory in Petaluma, Calif.
“An investor should not care if stocks have a flat year,” he said. “It is natural to feel that your plan might feel out of shape, which means it is a good time to consult with your advisor. Stick to the plan and over longer periods of time, you will come out ahead."
Stay The Course During Volatile Periods...
The day-to-day volatility should not be viewed as an alarming factor. Although investors believe that the markets are very volatile, the idea is only a fallacy, because volatility has not increased over the past 12 months, Johnson said. Instead, the increase in volatility has been limited to a day-to-day basis.
Volatility benefits investors because they are receiving a discount on the mutual funds or ETFs they are buying for their retirement portfolio.
“The best strategy for an individual investor is to continue to do dollar cost averaging in a diversified equity index mutual fund,” he said.
When stocks decline, investors tend to view it as a negative occurrence instead of interpreting it as a chance to buy certain stocks on their list at a discount.
“When the price of Apple falls 20%, people want to sell it and when the price of Apple rises 20% they want to buy more,” Johnson said.
Active Investing Can Affect Returns...
Investors need to stick with their allocation of stocks and bonds even when the returns in the market are relatively flat. They should avoid buying and selling equities frequently, because stocks rise in value over the long run, said Mitch Tuchman, managing director at Rebalance IRA, a low-fee Palo Alto, Calif. IRA advisor.
“Over decades, research shows, stocks returned 6.6% compared to 3.5% from bonds,” he wrote in a blog post.
Rebalancing a portfolio once or twice a year is sufficient for retail investors, Tuchman advises. Millennials should ensure that the fees they are paying in their 401(k) or IRA are minimal because even a difference of 2% in fees compounded over 20 years can add up to “dramatically more money,” he said.
“The name of the game for retirement is to compound your money at rate that will get you the most money,” Tuchman told TheStreet.
Following an active strategy means that investors can also wind up paying a lot of money in fees in addition to being at a greater risk for any downturns in the market or economy.
“There is almost no proof statistically that any of these strategies work over a couple of decades,” he said.
Instead, Gen X-ers and Millennials should adopt a strategy of buying a group of broad market, diversified ETFs, paying less than 1% in fees and avoid reacting to volatility by sticking with the large ups and downs in the market.
“People confuse losing money with volatility all the time, and it is a very flawed logic,” Tuchman said. “If you ride the wave, you will compound your money at 7% to 8% and double your money every ten years.”
Sitting in cash to determine when to get back into the market results in investors “selling out when things are at their worst,” he wrote. “Your retirement portfolio is not going to benefit from trying to time the market and pick which years to be in and which years to be out. Investors tend to get that kind of bet wrong pretty consistently.”
A flat year should not be viewed as a "bad" year, but simply a year that “you didn't lose money,” Tuchman added.
Stocks that pay dividends have an added bonus, because the money from it is reinvested when prices are lower than average or just flat.
“It's a great boost once those up years come back into play and they help you retire with more,” he wrote.
Consumer stocks also tend to perform well when the market is flat because those companies sell products that are necessities such as personal care and food, Johnson said. Utilities and energy stocks also hold their value better, because consumers rely on these items despite the current condition of the market.
Investing in stocks needs to be a long-term strategy, said Jimmy Lee, CEO of Wealth Consulting Group in Las Vegas.
“In the short run, stocks can be very unpredictable and many people who speculate lose money,” he said. “As far as this year being flat, I would wait around as we may finish up higher than what some may think.”