"Time in the market, not timing the market." It's a timeless lesson that we're taught at an early age and that advisors preach to their clients regularly. The beauty of this simple lesson is that we have troves of data to show the impact of an equity investor staying fully invested. Specifically, the impact on your total return when you are not invested during the best-performing days and the stock market's sneaky history of recovering following major price declines.
MISSING THE BEST DAYS
Over the last twenty years, if you were invested in the stocks of the S&P 500 but missed the ten best market return days, your average annual return before fees would have been cut in half – from about 7.5% to 3.5% annual return. In dollar terms, for $10,000 invested over that 20-year period, you would have missed out on $22,500 of return ($19,898 versus the $42,478 had you been fully invested). It's also important to note that many of these "best days" come during periods of stress in the markets, when some investors may have pulled out of the market in hopes of timing the bottom.
The impact is more severe if you miss more of these "best days". Missing the best 30 days over the last twenty years would have resulted in negative portfolio returns.
RECOVERY FROM CRISIS EVENTS
With the benefit of time, recoveries and bull markets have made the short-term "crisis events” appear insignificant, far outpacing the value lost in the draw down over longer periods of time. Trying to time your entry at the market bottom is a difficult task and often results in a losing proposition with more risk. Similarly, trying to time an exit at market's peak – even by a matter of a few days early or late – can take significant value from your portfolio's potential.
While hindsight is 20/20, you probably planned for market turbulence in your risk assessment. Staying invested ensures that you are not missing out on the short-term benefits of the “best days” or the long-term benefits of bull markets. Whether the bottom is behind us or we are in the midst of a bear market rally, we hope you find this perspective valuable in your investment portfolio conversations.