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Waiting Can Cost You

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The Importance of Remaining Always Invested

Every­one is famil­iar with the con­cept of “fash­ion­ably late”: inten­tion­al­ly arriv­ing late to an event in order to impress the oth­er guests. How­ev­er, when it comes to invest­ing, if you show up late, you might just miss the par­ty.

The cur­rent bull mar­ket recent­ly sur­passed its 8½ year mark, giv­ing me the oppor­tu­ni­ty to crunch some num­bers. What I found was rather inter­est­ing. There were 2,142 trad­ing days in the eight-and-a-half-year span run­ning from March 10, 2009 to Sep­tem­ber 9, 2017. If you were to sort those 2,142 trad­ing days from best one-day return to worst, FIVE out of the top fif­teen days hap­pened with­in one month of the bot­tom of the mar­ket.

8 yr Bull Market Trading Days | Waiting Can Cost You - Swan Blog | Swan Global Investments

Source: Morn­ingstar Direct, Swan Glob­al Invest­ments

Started from the Bottom

In the 31 days after the mar­ket bot­tomed, the S&P 500 was up 26.9%, an astound­ing amount over a very short peri­od of time. An investor who par­tic­i­pat­ed in the full eight years of the bull mar­ket would have had a return of 335.7%. An investor who arrived “fash­ion­ably late” and missed that first month of the bull mar­ket would have had a return of 243.4%. While a return of 243.4% is cer­tain­ly impres­sive, the cost of miss­ing that first month was 92.3%.

If the first month of the bull mar­ket was a 26.9% gain, why would miss­ing it lead to an over­all deficit of 92.3%? That doesn’t seem to make sense…unless you take into account the com­pound­ing of returns.

Compounding Returns in the Real-World

In a pre­vi­ous blog post and white paper, the first key math­e­mat­i­cal prin­ci­ple we dis­cuss is tak­ing advan­tage of com­pound­ing returns. While we pre­vi­ous­ly explored the top­ic from a the­o­ret­i­cal, aca­d­e­m­ic stand­point, the analy­sis of the bull mar­ket pro­vides insight to the pow­er of com­pound­ing in a real-world sce­nario.

For exam­ple, let’s assume a $100,000 ini­tial account val­ue: one right when the bull mar­ket start­ed and the oth­er a sin­gle month lat­er.

Initial Investments a Month Apart Before Bull Market | Waiting Can Cost You - Swan Blog | Swan Global Investments

Source: Morn­ingstar Direct, Swan Glob­al Invest­ments

By cap­i­tal­iz­ing on that first month “pop” of 26.9%, the account val­ue increased by $26,890. That addi­tion­al $26,890 went on to com­pound by anoth­er 243.4% over the next eight years and five months. The “late­com­er” approach was at an imme­di­ate deficit from which it nev­er recov­ered.

This is the pow­er of com­pound­ing returns in action.

To take full advan­tage of long bull mar­kets, one must be invest­ed before it even begins. But what is the best way to achieve this? One can attempt to time the mar­ket bot­toms and tops or remain in the mar­ket at all times.

Market Timing is Risky and May Not Pay Off

Mar­ket tim­ing is very dif­fi­cult to imple­ment, and get­ting it wrong can have sig­nif­i­cant con­se­quences. The num­bers above illus­trate that well.

Think back to those dark days of ear­ly 2009. How many investors were ful­ly invest­ed and able to cap­ture those out­sized returns? After being bruised and bat­tered by the over 50% sell-off in the mar­kets, how many threw in the tow­el? When did those investors final­ly have the con­fi­dence to return to the mar­ket? Call­ing the bot­tom of the mar­ket is quite dif­fi­cult but get­ting back in can be even more so.

It is also dif­fi­cult to call the top of a mar­ket. A quick sur­vey of the head­lines has expert opin­ions com­plete­ly across the board as to how much gas is left in the tank of the bull mar­ket. But there’s only one sure­fire way to know when the bull mar­ket is over: after a 20% drop.

Remaining Invested through It All

When bear mar­kets switch to bull mar­kets, it is not always a grad­ual turn­around; more often than not, it’s a big “pop” as the num­bers demon­strat­ed above. We saw this at the end of the Dot Com crash as well. If investors wait until the mar­ket recov­ery is on sol­id foot­ing, they might just miss the full range of a bull market’s returns.

It is for these rea­sons why the Defined Risk Strat­e­gy has the mot­to, “Always Invest­ed, Always Hedged.” We do not try to call mar­ket tops. We do not try to call mar­ket bot­toms. We do not fol­low a sec­tor-rota­tion or risk-on/risk-off strat­e­gy. We fol­low our guide­lines regard­less of whether the mar­ket has just sold off by 50% or is in an 8½-year bull mar­ket.


About the Author:

Marc Odo, Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Director of Investment Solutions - Swan Global Investments

Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Direc­tor of Invest­ment Solu­tions, is respon­si­ble for help­ing clients and prospects gain a detailed under­stand­ing of Swan’s Defined Risk Strat­e­gy, includ­ing how it fits into an over­all invest­ment strat­e­gy. For­mer­ly, Marc was the Direc­tor of Research for 11 years at Zephyr Asso­ciates.




Impor­tant Notes and Dis­clo­sures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®).

All Swan prod­ucts uti­lize the Defined Risk Strat­e­gy (“DRS”) but may vary by asset class, reg­u­la­to­ry offer­ing type, etc. Accord­ing­ly, all Swan DRS prod­uct offer­ings will have dif­fer­ent per­for­mance results due to offer­ing dif­fer­ences and com­par­ing results among the Swan prod­ucts and com­pos­ites may be of lim­it­ed use. All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970–382-8901 or www.swanglobalinvestments.com240-SGI-092117


By |2018-10-02T11:10:38+00:00September 21st, 2017|Blog|Comments Off on Waiting Can Cost You: The Importance of Remaining Always Invested