Should I Sell Everything In My Retirement Accounts and Wait Out The Market? The Research Says “No”.

Jan 30th, 2009 | Filed under: Analytics and Metrics, Industry, Investing, Investing Rules You Should Know

Yesterday, Fidelity released its Dr. Suess-like named report, The 2008 State of the 401(K) Update, that reveals what we are all doing with our retirement funds in the face of one of, if not, the worst market of our lifetimes. With access to over 11MM retirement accounts, Fidelity is in a unique position to serve as a barometer for individual investor behavior. The key takeaway is that investors “continue to contribute to their accounts at normal historical levels.”

This is likely good news since market timing- an investment strategy based on trying to predict the future performance of the entire stock market- is incredibly difficult, if not nearly impossible, to work over the long term.

If you are considering selling all of your positions, moving to cash, and waiting until the market’s prospects improve, research suggests you will miss out on the uptick.

In the definitive study on market timing, professor H. Nejat Seyhun analyzed the monthly performance of a broad index of U.S. stocks from 1926-2004 as well as the daily performance from 1963-2004 and found that most of the gains and losses are achieved in just a small number of days and months. Put simply, since no one can predict daily and monthly movements in the market and if you have a long-term view of your investments, you are far more likely to do well by waiting out the bad days/months to experience the good days/months.

You can see for yourself in the chart below. If you look at the monthly returns over the 68 year period, if you missed the best 12 months, your annualized returns would decrease from 10% to 7%. Compounded annually over long periods, that is a considerable gap.

If you look at the research on a daily basis, the same conclusion is reached. If you missed the best 90 days over that 40 year period, you would have missed over 7.5% in annualized returns.