06 Dec The Cost of Missing the Market’s Best Days
Investors would do better to worry about their “time in the market” rather than trying to “time the market”.
The chart below shows the hypothetical performance of $10,000 invested between 1/1/1991 and 12/31/2015 in the S&P 500 when a number of the best performing market days were excluded, compared with remaining fully invested for the entire 25-year period.
A few highlights:
- Missing out on the single best day in the market during the period reduced the ending account value by more than $10,000.
- Missing the 10 best days – less than 0.20% of the trading days during the period – resulted in an ending account value of less than half compared with the account that remained fully invested.
- Missing the 25 best days in the period – on average one day per year – reduced the annual return by nearly 6%!
The point of the graphic is that for those investors lacking a crystal ball, attempts to time the market may significantly dampen returns versus a strategy of buying and holding onto investments for the long-term. It could be argued that this illustration is oversimplified and that someone missing the market’s best days through attempts to time the market might also reasonably miss some of the market’s worst days. Fair enough. However, beyond the evidence of our inability to accurately or consistently predict short-term market movements, human nature actually makes us more likely to buy when prices are high and sell when they are low. In addition, these figures do not include the impact of taxes and transaction costs, which would further erode the returns of those trying to time the market rather than using a buy-and-hold approach.
The commentary above is intended for general information purposes only. You should discuss your specific situation with a trusted professional.