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Why Mistiming The Market Can Be Disastrous
Advocates of buy-and-hold stock investing make a strong case as to why it can be disastrous for a novice investor to try to time the stock market. It’s been shown that frequent trading generates higher fees, and that emotional trading leads to buy-high, sell-low behavior. Also, every time you trade an individual stock, you’re betting that you know more than the Wall Street experts and their high-frequency trading algorithms.
Those are good reasons, and they make a strong case for adopting a simple investing strategy, focused on index funds, that you can stick with through good times and bad. But it wasn’t until recently that I learned of another compelling reason to believe in the buy-and-hold strategy: There have historically been only a handful of great days for the stock market every year. And if you miss even a handful of them because you’re trying to time the market, you will dramatically lower the overall return on your investments.
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Market Days You Don’t Want to Miss
The stock market can be a wild ride. Swings of 30% in value during short but volatile periods are not uncommon. When times get rocky, there can be daily percentage changes of 15% or more in either direction. So, what would happen if you tried to time the market and ended up missing out on the days with the biggest positive changes?
Long story short, it’s not good.
Here’s what Fidelity found when they crunched the numbers on what would happen to a hypothetical $10,000 investment into an S&P 500 index fund from 1980 to 2018 if you missed the best five market days.
(Note: They disregard taxes and fees for simplicity.)
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. Missing the best 10 days will more than halve your long-term returns. Once you miss out on the 50 best-performing days, you might as well have been investing in the Juicero instead of the stock market.
The above chart tracks a 38-year period, or roughly 10,000 days of stock trading. So, if you think you can time the market, you’re betting that you can get in and out without missing just five of those 10,000 days — which could happen at anytime. To an average Joe like me, it seems far simpler to just stay invested rather than take on those odds.
Another good reason to stay invested is that the majority of the best stock market days throughout history have come in the midst of significant market downturns. Of the top 10 biggest gaining days, six occurred during the chaos of the early 2000s tech bust or the 2008 Great Recession. 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.”