Letting Your Money Work For You

Whether you avidly follow the stock market or simply tend to glance weekly at its rise or fall, everyone at this point knows that the market has gone up quite considerably in 2021. In fact, it has gone up so much this year that it has some people spooked. How could the market be rising month after month and yet have people being scared to enter?

Well, people are rational, and seeing the stock market rise so much in 6 months has people worried that what goes up, must come down. As people sit on the sideline waiting for the right moment to enter the stock market, what many do not realize is that they are essentially losing money right now. In the past 12 months ending May 2021, inflation has risen 5%. So, while many are worried about entering the stock market, leaving massive amounts of money in one’s savings account is counter-productive, as it is losing massive amounts of value day-by-day.

People have a tendency to try and “play” the market, and as financial advisors, we always recommend avoiding this strategy. Playing the market is an ill-advised strategy because it can often lead to missing out on stock market gains.

At Emergent, we did a study analyzing the annualized gains of the S&P 500 for the past 10 years, recording the 20 highest individual gain days of the market during that tenure. As of December 2020, the S&P 500 has had an annualized return of 13.79%.

Now, what happens if you tried to play the market over those 10 years and happened to miss the 5 biggest gain days? That number drops to 9.71%. That is a 4% drop for missing 0.1% of days over the course of 10 years! Double the number of missed days, and the annualized return drops to 7.18%, almost half of what it could have been.

When it comes to the stock market, it is impossible to know when those incredibly large gain days are going to occur, so it is especially important to remain invested. Staying in cash while trying to guess the market may seem like a sound strategy at first, but inflation is eating away at your purchasing power while you are also potentially missing out on some massive stock market days.

And those days can be the difference between a good portfolio and a great one.

“Knowing is not enough; we must apply. Willing is not enough; we must do.” Johann Wolfgang von Goethe