Power Up Wealth podcast – Market Timing vs. Time in the Market – Episode 31 transcript:
Sharla Jessop 0:00
Timing the market and time in the market are completely different. One can lead to unexpected consequences. I’m Sharla Jessop, and today my guest, Parker Thompson, will explain the differences and which one can help investors find success.
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Parker, thank you for joining me today.
Parker Thompson 0:52
Happy to be here.
Sharla Jessop 0:53
Parker is part of the wealth management team at Smedley Financial and he has a passion for educating people and helping them make sound financial decisions. Parker, what fascinated you about this topic?
Parker Thompson 1:05
Yeah, I think that I found this story a few years ago, and I have always kind of looked back on it. Because that’s kind of an a in the investing world, that’s a big question. Do you try to time the market? You know, the ups and downs? Or do you try and just stick to it stick to your guns and just over time you get the returns? Which is superior, right? It’s kind of this black and white. Always this question that gets raised in this debate. To me, this is a story that just depicts the data behind it clearly, right and something that we can understand. It actually uses real-life data instead of theoretical.
Sharla Jessop 1:41
The story is really about three different women. I appreciate that. Thank you. It’s about three different women dealing with the market and their responses and what they did. So tell us a little bit about these women.
Parker Thompson 1:53
Yeah, the background to the story is, there’s three women, yes, it’s Tiffany, Brittany, and Sarah. And they have each invested $200 a month or save $200 a month into an S&P 500 Index fund for 40 years. Over the course of 40 years. And for those who don’t know what an index fund is, that just maps the general S&P 500 Index, which is just 500 companies in the US over 40 years is what this index fund and what they’ve invested in. So they’ve simply bought, bought, and held these indexes, this index fund, and they’ve reinvested their dividends. But they’ve all used different times to jump in the market. So this is where it gets interesting. Tiffany, her last name is Top, coincidentally, has the worst market timing. She saved her $200 a month, month over month, and waited and invested when she felt good, which always wasn’t the best time it was always at the top of the market right when it was at its best right before a crash. And she would invest her money and constantly watch it drop 20 to 30%, the day after, couldn’t be worse. And then you have Brittany’s last name Bottom. So Brittany Bottom is always perfect with her investing. About as good as you can get. She saved her $200 a month, waited, and invested at the bottom of every market downturn. Basically pulling off something that’s impossible that many of us wish that we could we could do. And then there’s Sarah, last name Steady. Sarah steady. And she is a little bit different. She set up her account. She invested $200 a month. Just invested it every month and didn’t wait for any ups or downs in the market. And so over 40 years, she really didn’t look at our account at all. And at the end of these 40 years, they all look at their accounts. Tiffany Top, who is the worst investor, had $700,000. Britney Bottom ended up with $1.1 million. And Sarah Steady, who didn’t really look at her account until 40 years later, actually ended up at $1.3 million. So actually, she did better than everyone else, just not even trying to time the market. Just steadily investing and staying consistent with her investments.
Sharla Jessop 4:04
You know, those are great stories. And they really, they probably reflect a lot of different people and their decisions and what they do. Tell us a little bit about what happened during this period of time because this is over a 40-year period of time. They’ve obviously experienced some different things.
Parker Thompson 4:22
A lot of people say oh well that’s in the past, right? You can’t relate it to what’s going on right now. The today is different. And I’ll agree, for some things, there are different things that are happening today. But they’ve each gone through five market crashes. As far as the data goes. Those include in 1987, Black Monday, in 1990, the Kuwait war. In 2000 to 2002, the Dot Com burst, the bubble burst. In 2008, the great recession and in 2020 more recently, COVID. Each of these market drops were somewhere between 20 to 40, sometimes 50% drops in the market. And so those are the things over 40 years that they’ve gone through. And the reason I liked this story is that it gets updated as time goes on. So the year that we’re currently in, which has a little bit of all those events, right, the Ukraine war, supply and demand and inflation, causing a little bit of a market crash here. That is something that will get priced into this scenario, once it’s over, right, once we’ve gotten out of it. But these women, it’s not like they’re enduring things that we’ve never seen. We’re currently in it right now. Right? But they’ve been through things that we’re experiencing, and the emotions that they’ve had to get through these are the same emotions that we’re experiencing now.
Sharla Jessop 5:46
Emotions drive a lot of what we do, even though we think we can emotionally block out what happens in the market and you know, step aside and make decisions that are not emotionally charged, it’s really difficult for people to do that, investors as a whole. So how do these women deal with that?
Parker Thompson 6:05
Yeah, I think hindsight is 2020, right? You can always look back and back. Oh, well, they’ve, you know, you’ve been through that. And it’s easy to say that if you just stick to your guns, you’ll end up okay. But in the moment, it’s scary, right? Like, we were not sure exactly what’s going to happen today, or tomorrow, or in the next few weeks, next few years. We just don’t know, we wish we had a crystal ball. And so I tried to make it something simple and easy, right? Rather than try to manage our emotions, not knowing what’s going to happen. I just stick to principles. And these women have stuck to principles. And those are the consistency, the patience and the diligence of just investing and knowing that as they invest and as they can continually try to be better with their money in their finances, that they will end up okay. In the long run.
Sharla Jessop 6:50
Most people today have 401(k)s where they’re making they’re doing this systematic investment comes out of their paycheck every month. And I know that you have fielded some phone calls, and I have of clients who are thinking, what should I do with my 401(k)? Should I stop contributing?
Parker Thompson 7:08
Yeah, and this story plainly points out that, no, this is probably not the good time to do that. What I would say is that we’re most people are kind of scared because the market has not been so good. Right? This is more of a buying opportunity than it has been in a while. So as markets have gone down, and as things are not looking so good, the money that you’re putting in is going to be worth more to you in later years than it would have if it was an up market. Just because you’re going to get more of a return on that over time. And so probably the exact opposite. Instead of not trying to contribute maybe you consider contributing a little bit more or the same as what you’re doing.
Sharla Jessop 7:46
Because you’re buying on sale, it’s a discount, you know, people drive miles and miles to get discounts.
Parker Thompson 7:51
Yeah, I mean, we we go and eat our Thanksgiving dinner and then walk out the door that next that afternoon and go Black Friday shopping for all these deals. You can imagine it’s very similar with the market right now. Why are we not taking advantage of the deals that are on hand?
Sharla Jessop 8:04
I agree. And some people think one of the things that Sarah Steady didn’t really have to worry about was recency bias, because she’s consistently putting your money in. Recency bias makes us think, you know, Henny Penny, the sky is falling, and it’s never gonna stop.
Parker Thompson 8:19
The reason why I like this is because it’s over 40 years. You can’t say it’s recency bias, because it’s such a long period of time. What’s happening right now in this week or this day, or this month, is very unimportant. It’s basically pales in comparison to what’s going to happen over 5 to 10 to 15 to 40 years in this case. And so what we see is market returns in the last year, or the last couple of years, is very different to what it’s going to be in the next 5 or 10 years. And we can be a lot more confident that if we stick to our guns, we’ll end up in a better position, right? Because the recency bias thinks that, okay, what’s been bad is going to be worse, right? Instead of what’s been bad turned out very well for us in the long run.
Sharla Jessop 9:01
What about how do you reconcile passive versus active money management?
Parker Thompson 9:07
I think for me, I’ve always kind of been a big fan of passive just because of the story, right? Because it has to do with the principles, right, the consistency, the patient’s the diligence, and you’ll end up where you’re at where you’re supposed to be in the long run. But I think what people need to know is, if you are doing active management, and if you are opting to do active management, the principles stay the same for you, right, you have someone that’s dealing with the money for you, and they can make all the money moves, but your principles that you stick to your consistency in investing your patience with the money movement, and your diligence of just making sure that you’re handling what you can control with money that stays the same. So whether you’re investing passively and you’re not paying attention to it, or you’re investing actively and someone is paying attention to it for you. You’re budgeting. You’re investing. Your control over your money remains the same. I find that fascinating.
Sharla Jessop 10:02
And consistency.
Parker Thompson 10:03
Yeah, and our consistency. So as long as we’re doing what we can control and what we can on our end, whether someone’s managing money for us or something is managing it passively for us, we don’t need to change what we’re doing.
Sharla Jessop 10:15
What can our listeners take from this story?
Parker Thompson 10:18
I want to go back to the principles, right, the patience, let time kind of ride out and let the market do its thing. The consistency to stick to our guns to budget to save, to invest, and the diligence to make sure that emotionally we know that things are going to work out over time, right? And right now, it may not look good, it may look kind of grim. And but if we stick to it, that we’re going to end up better off. I think that’s, that’s the biggest takeaway from the story is that over the course of 40 years over the course of long-term or even I mean, a lot of investors say, hey, I don’t have 40 years. They’re in their retirement, right. I can’t bet on 40 years. Well, I think we can, you can pull this back to 5 or 10 years. And you see the same result that those who are consistent, who didn’t think about pulling their money out every year or two, over the course of five or 10 years are still better off than those who aren’t.
Sharla Jessop 11:14
Consistency really protects us from overreacting.
Parker Thompson 11:17
If you have a plan and you stick to it, and you take the emotion out of it, which is very hard to do, especially after this year, then you can end up in a really good spot.
Sharla Jessop 11:25
Parker, those are great principals, thank you so much for joining us.
Parker Thompson 11:29
Appreciate it. Thanks for having me on.
Shane Thomas 11:34
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
