Market timing is still tricky
I was curious, given the strong U.S. large cap equity returns over the last couple years, whether the story of missing the best days had changed at all. Spoiler alert – it hasn’t. Like I said then, market-timing is difficult, and the risk of being wrong is high. If an investor is too early to get out (or too late getting back in), they may miss future growth. Making those predications has the potential to increase – and decrease – wealth substantially.
As the updated chart shows, even missing just a few of the best days in the market can have a negative impact on the value of an investment.
Source: Russell 1000® Index. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. This hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. Investments do not typically grow at an even rate of return and may experience negative growth.
An investor who missed the best 10 days in the market (represented by the Russell 1000® Index) over the last 10 years would have experienced a return half that of an investor who was invested all days. If one missed the 10 worst days, to be completely fair, their portfolio value would be double an ‘invested all days’ portfolio. From half to double - that’s a big swing in portfolio values from timing. In fact, if we extend the number of missed days to 20, 30, even 40, the difference is striking – miss the 40 best days over the last 10 years and the investor is left with just 35% of their original portfolio value. Conversely, miss the 40 worst days, and their portfolio value would be seven times the value of the "invested all days."
It is interesting that 6 of the 10 "best" days occurred during the 2-month period from mid-October 2008 through mid-December 2008. And, 7 of the 10 "worst" days occurred during that same time period; often with a "best" followed shortly by a "worst", and vice versa. What does that highlight (other than a reminder of the extreme volatility of that period)? Knowing when to get out and back into the market is tricky. Get out right after a "worst" day, and one might not get back in soon enough to catch a "best" day. In our experience, it’s really hard to make both decisions correctly on a consistent basis.
Source: Russell 1000® Index. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. This hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. Investments do not typically grow at an even rate of return and may experience negative growth.
An investor who missed the best 10 days in the market (represented by the Russell 1000® Index) over the last 10 years would have experienced a return half that of an investor who was invested all days. If one missed the 10 worst days, to be completely fair, their portfolio value would be double an ‘invested all days’ portfolio. From half to double - that’s a big swing in portfolio values from timing. In fact, if we extend the number of missed days to 20, 30, even 40, the difference is striking – miss the 40 best days over the last 10 years and the investor is left with just 35% of their original portfolio value. Conversely, miss the 40 worst days, and their portfolio value would be seven times the value of the "invested all days."
It is interesting that 6 of the 10 "best" days occurred during the 2-month period from mid-October 2008 through mid-December 2008. And, 7 of the 10 "worst" days occurred during that same time period; often with a "best" followed shortly by a "worst", and vice versa. What does that highlight (other than a reminder of the extreme volatility of that period)? Knowing when to get out and back into the market is tricky. Get out right after a "worst" day, and one might not get back in soon enough to catch a "best" day. In our experience, it’s really hard to make both decisions correctly on a consistent basis.