Why Trying to Time the Market is a Losing Strategy
You Don't Want to Miss The Best Days
As an investor, you have to be pretty happy with the S&P 500 returns over the last five years:
Unfortunately, many investors missed out on these gains.
Why?
They allowed their emotions to get the best of them and tried to time the market. Their accounts were going down, and they just couldn’t take it anymore.
Or, they were waiting patiently on the sidelines with their hard-earned cash, waiting for the “all clear” sign. Unfortunately, they are still waiting and it is costing them…
Too many investors want to avoid temporary declines, and in doing so, they sacrifice all of the permanent gains, derailing their long-term plans.
Vanguard conducted a study analyzing the performance of stocks from June 1996 to March 2024. During this period, stocks achieved a 9.7% annualized yield, translating to a cumulative increase of 1,218% over the 28-year period.
This growth occurred despite major upheavals such as the dot-com bubble, 9/11, the Great Financial Crisis, the "lost decade," the COVID-19 pandemic, and various wars.
During this time frame, stocks experienced significant drops between 20% and 55% on five different occasions.
While avoiding these declines sounds great, you would also be missing out on the market’s best days.
To illustrate this point, Vanguard ran a simulation of an initial $100,000 investment in a 60% stock, 40% bond portfolio.
If you stayed fully invested over the nearly 30-year period, your portfolio would have grown to $865,000.
However, if you missed just the five best days, over the entire 28-year period, the portfolio's value would drop to $659,000. Missing the 10 best days would reduce the investment's growth to $540,000…
Just a few good days can make up for a slew of bad ones.
Did you know the S&P 500 went up over 11% in a single day on October 13, 2008?
Then it went up another 10% on October 28, 2008.
Market timing, or not staying fully invested, can significantly disrupt your long-term returns. Some of the best days for the market occur during these bear markets…
One of the primary reasons you won’t succeed as an investor is because you are too focused on short-term price movements.
If anything, embrace the declines, especially if you aren’t retired. Your reinvested dividends are buying more and more shares (they are being reinvested, right?)
By staying invested and focusing on long-term goals, you can weather the storms and ultimately benefit from the market's enduring upward trajectory.
Instead of reacting to short-term noise, build a portfolio aligned with your objectives and stay the course:
Patience sometimes requires more strength of character than does action.
Ferdinand de Lesseps (1805–1894), developer of the Suez Canal, quoted by Chris Davis in his memorial tribute to Charlie Munger.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.