There are many people out there who claim to know when to buy and when to sell stocks at the “right time”. What could be better than selling before the market goes down and buying before the market goes up? This type of investing is referred to as “market timing,” and its appeal can be very seductive. However, being out of the market for even very short periods of time can be devastating to one’s portfolio performance.
During the 10 year period from June 2006 to June 2016, an investor who was invested for the entire period earned an annualized return of 7.4% per year. If you were to miss the 10 best trading days, during those 10 years, the return drops from an annualized return of 7.4% to a measly 0.3%. If you were to miss the best 40 days, the return would have dropped to a devastating negative 10.3% per year. This behavior clearly shows that market returns tend to come in very short bursts. The bottom line is that if you were not invested for these 40 days, your return drops from 7.4% per year to negative 10.3% per year – a spread of 17.7%.¹
The following table demonstrates the impact on stock market performance of missing 10, 20, 30 and 40 best trading days.
Looking back after each significant market decline, there is always someone who sounded the alarm and who turned out to have made the correct call. These people then become famous, but over time when they do not repeat their previous success, they eventually fade away.
The moral of the story is that you cannot afford to rely on the guesswork of someone who might be right only once, when the cost is so significant. The better strategy is 1) develop a long-term investment plan and 2) stick with that plan.
– Jon Gardey, President and Chief Executive Officer
¹Marmer, CFA, Harry S., Lessons from Capital Market History, Part 1, CFA Institute Magazine,
Dec. 2016, Volume 27, No. 4 CFA Institute