Is It Time To Time The Market?
Buy low and sell high. This advice sounds simple enough. And with the S&P 500 touching all-time highs, the temptation to sell can be overwhelming for some. But is attempting to time the market really a sound approach for investors?
Have to be right twice
Investors who sell their holdings when they believe the market is overvalued have to do more than be correct on their decision to sell. They must also successfully re-enter the market at some future date. When the market has sold off in the past, historically, it has rebounded to higher levels. If an investor is not prescient, he may end up re-buying at even higher prices, missing out on important gains.
Lost income
Since 1900, dividends have contributed ~47% of the total return of the S&P 500. By exiting the market, investors forgo this important source of investment return. Additionally, investors who rely on dividends for income may be forced to draw down principal when they are out of the market, increasing the chance their wealth does not last. According to Senior Analyst Andrew Givens, dividends are an integral part of First Fiduciary’s strategy. “We like dividend-paying stocks for their reliable stream of income and the insulation they provide during market downturns.”
Taxes
A taxable investor will owe tax on any capital gains realized upon selling a security. The federal tax rate on such gains ranges from 10% to 43.4% in the United States. By not selling, investors can defer this tax liability indefinitely. As Warren Buffett pointed out, “In economic terms, the liability represents an interest-free loan from the U.S. Treasury.” Effectively leveraging this “loan” is a powerful way to augment investment returns over a very long time period.
Chief Operating Officer Bill Henry further outlines First Fiduciary’s process: “We at First Fiduciary are not market timers. We believe in the benefits of staying invested for the long-term. Rather than make rash wholesale changes to portfolios, we evaluate each stock on an individual basis. We would consider selling a position if we determine that a company’s shares no longer offer the potential for satisfactory returns (inclusive of any tax considerations) or we find better opportunities elsewhere. It is this level of discipline that has allowed us to deliver solid returns through many market cycles.”