Market Timing in the Stock Market Is a Great Way to Lose Money.

Trying to avoid rough patches in the stock market, like we are currently experiencing, is an exercise in futility. It’s not fun; in fact, it can be downright scary to check the value of your investment holdings at a time like this. However, if your investments have been allocated to match your financial situation, over both the short-term and the long-term, and any other needs have also been taken into consideration, this is not the time to sell nor trade your investments. Many studies have been done that show how unlikely it is that you will improve your results by buying and selling at times like this.

We conducted a study, which is shown in the following table. If you had invested $10,000 in the S&P 500 Index on the last day of 2004, and chose to reinvest all dividends, you would have had $28,074, as of yesterday (March 12th). A fairly attractive gain of just over $18,000. If you had made that same $10,000 investment at the end of 2004, but missed just the 10 best days in the market, you would have had a little over $14,000, a gain of just over $4000 for the same time period. You read that right; if you missed only the 10 best return days in the last 15 years, you would have dramatically reduced your gains! In fact, as the table below shows, if you missed the 20 best days or more, you would have lost money over that same 15-year period.

Investment Returns Using the S&P 500 Total Return Index From December 31, 2004 – March 12, 2020

 Fully Invested with Dividends ReinvestedMissed the 10 Best Return daysMissed the 20 Best Return daysMissed the 30 Best Return DaysMissed the 40 Best Return Days
Initial Investment on 12/31/2004$10,000$10,000$10,000$10,000$10,000
Ending Investment on 3/12/2020$28,074$14,152  $9074  $6114$4332

Source: Yahoo Finance for index price data ( Bernstein Financial Advisory for all calculations and analysis. All figures are before mutual fund fees and taxes.

It might be tempting to think that even though this is true, you could have also missed some big down days as well. Here’s the problem with that line of thinking. When there is uncertainty in the market, as there is now (and there was during the 2008 Financial Crisis), investors get very nervous and the stock market gets very volatile. That volatility means there are big swings in the market – both up and down.

In fact, looking at the 2008 Financial Crisis from September 12, 2008 (the Friday before Lehman Brothers declared bankruptcy) through the end of that year, the market declined -27%. At the same time, 7 of the 10 best return days over the past 15 years occurred in that same time period. Of the 3 remaining top 10 days, 2 of them occurred a few months later in March 2009. That turned out to be the market bottom, but that wasn’t known for several more months. Similarly, since the beginning of this month through today (March 13th), we have experienced 4 of the top 25 best return days in the last 15 years. It’s great to avoid a big decline in the market. The problem is that you will also likely miss a good part of the recovery, as the table above clearly shows.

There is no question that leaving your properly allocated investments alone at a time like this is psychologically difficult. Nonetheless, history has proven time and time again, that it will pay off over the long term. There is every reason to believe that the same will hold true this time. To be clear, this is not intended as a blanket recommendation. You should consult with a financial professional to ensure that your goals, time horizon, and risk tolerance align with your investment allocations. If you’re feeling nervous, and you would like to discuss your investments, or you would like to schedule a free, no-obligation introductory meeting, contact us here or send an email to [email protected].

John Bernstein