October 31, 2020
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The Cost of Bad Market Timing Decisions in 2020 Was Annihilation

From a 2,997-point rout in the Dow to two 9% single-day rallies in the S&P 500, the 2020 stock market has served up a raft of tantalizing sessions for would-be market timers. Hours came and went in which whole years could be made or lost.

But for all the dizzying turbulence, it’s worth noting that the S&P 500 is nearly flat for anyone who sat tight and held through the chaos. Mistakes stand out in an environment like that — the back-breaking costs of even a few wrong moves in a market as turbulent as this one. Maybe volatility is the time for active managers to shine, but the downside of getting it wrong has rarely been greater.

One stark statistic highlighting the risk focuses on the penalty an investor incurs by sitting out the biggest single-day gains. Without the best five, for instance, a tepid 2020 becomes a horrendous one: a loss of 30%.

The exercise highlights the danger of trying to call the market’s peak, something that investors are feeling tempted to do now with the S&P 500 hitting a wall at the 3,200 level, coronavirus infections rising and the worst earnings season in a decade about to kick off. In a recent survey conducted by Citigroup, more than two-thirds of investors see a 20% decline in the market as more likely than a gain of a similar amount.

“We want to be tactical,” Yana Barton, a fund manager at Eaton Vance Management, said in an interview on Bloomberg TV. “But the problem is, it’s easy to get out and you don’t know when to get back in.”

However prudent it sounds, the cost of bearishness is exemplified by the hedge fund crowd, whose reluctance to embrace equity gains is one reason they’ve lagged behind the market. In perhaps the most famous case to date, legendary investor Stan Druckenmiller told television interviewers he was “far too cautious” and had made “all of 3% in the 40% rally.” Broadly, hedge funds that focus on equities were down 6.3% in the first half, according to data from Hedge Fund Research. That compared with a total decline of 3.1% in the S&P 500.

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