You describe yourself as a long-term investor. Great at buying and holding. Until you hear a news update. You panic and sell. Or a friend tells you a great stock tip you’ve just got to buy now. In both instances, you probably bought when the market was high and sold at the bottom.
“Panic selling not only locks in losses, but also puts investors at risk for missing the market’s best days,” wrote Pippa Stevens, Markets Reporter for CNBC.
Long-term investors trying to time the market usually end up missing the 10 best days of the market. Should you worry about it?
Says Stevens, “Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500’s 10 best days in each decade, total returns would be just 91%, significantly below the 14962% return for investors who held steady through the downturns.”
In an article written by Lance Roberts, he analyzes Stevens’ CNBC article, with these words, “But here was her key point, which ultimately invalidates her entire premise: ‘The firm noted this eye-popping stat while urging investors to avoid panic selling, pointing out that the ‘best days generally follow the worst days for stocks.’”
Roberts continues, “The statement is correct, as the S&P 500’s largest percentage gain days tend to occur in clusters during the worst of times for investors. For an investor trying to catch the market’s best 10 days, they wound up losing almost 30% of their portfolio.”
But What About the 10 Worst Days?
A few years ago, Javier Estrada, a finance professor at the University of Navarra in Spain did a study where he looked at Wall Street and 14 other stock markets around the world. He examined a century’s worth of day-to-day moves.
His study found “that if you missed the 10 best days of the market, you did indeed give up much of the gains. What he also found is that by missing the 10 worst days, you did remarkably better.”
The chart below contains information from articles written in March 2020 mentioned above. The blue highlight shows trading in late March. Investors would need more than a 40% return just to return to break even.
When investing long term, it’s important to avoid major drawdowns. Roberts stated, “If I am not spending the bulk of my time making up previous losses in my portfolio, I spend more time compounding my investment dollars towards my long-term goals.”
In 40 years of investing, missing the 10 best days would have cost you about half your capital gains. However, avoiding the 10 worst days would have given you two-and-a-half times the capital gains of someone who simply stayed in the entire time.
Timing The Market
What would happen if you tried to time the market? A post from The Simple Dollar explains Why Mistiming the Market Can Be Disastrous.
You’ve already seen what happens when you miss the 10 best days and avoid the 10 worst days. Drew Housman, writing for The Simple Dollar, gave a hypothetical example of $10,000 invested into an S&P 500 index fund from 1980 to 2018. This chart shows what Fidelity found if you missed the best five market days.
Of course, fees and taxes aren’t included in the example. “Missing the five best days when you’re otherwise fully invested drops your overall return by 35%! And the results only get worse the more good market days you miss.”
Concludes Housman, “Even though it can be hard, it’s crucial to avoid panic selling when the market struggles. As the saying goes, ‘It’s all about time in the markets, not timing the markets.’”
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