Trying to time the market seems like a simple task. Investors know the stock market does not move in a straight line throughout the year and there will be periods when stocks rise and periods when stocks fall. In an ideal world, investors would buy every dip and sell every rally (buy low, sell high). This is often the easiest thing to say and one of the hardest things to accomplish.
In 2023 alone, the chart below shows the S&P 500 has had several waves higher (green arrows) followed by moves lower (red arrows). Those that could successfully buy to ride the waves higher and sell on downturns would likely be quite happy with their performance. Actual results, however, are usually far different than this experience. Investors’ emotions often lead them to get conservative during times of decline and more aggressive as markets rally, which can detract from performance by buying high and selling low.
Gradient Investments believes time in the market is better than trying to time the market. This year the stock market, measured by the S&P 500, is up 14% year to date through Nov. 7. This performance, as shown above, has not been a linear advance higher but has had several waves higher followed by moves lower. After rising nearly 20% in first half of the year, a decline of 10% ensued, which was then followed by a 6% rally.
Further, the 14% return of the S&P 500 is surpassing the average annual return of 9% for the last 20 years, but most of the performance this year has come from a select number of days. If an investor misses out on even a small amount of the good days in the market, performance can be significantly worse than the average. The best eight performance trading days explain all the market gains for the year, which is a relatively small percentage of the 215 trading days in 2023. The eight days and the returns are below:1
- January 6 +2.3%
- January 20 +1.9%
- March 3 +1.6%
- March 14 +1.6%
- March 16 +1.8%
- April 27 +2.0%
- May 5 +1.8%
- November 2 +1.9%
A study done by JP Morgan Asset Management2 reflects the impact on missing this relatively small number of positive days over time. The chart below shows the different performance levels of the S&P 500 over the last 20 years by staying the course versus missing the best days in the market. Staying the course over time earned 9.8% annually but missing out on the best 40 days during that time creates negative annualized returns. This year, if the best 10 days1 were missed, the year-to-date performance of the S&P 500 would be negative, a big difference from the current 14% gain.
Gradient Investments believes a key to a successful investment outcome is to remain fully invested in accordance with a well-defined investment plan that considers the objectives for the money but stays within the bounds of risk tolerance. When the market sells off or corrects, the losses can feel painful, but the long-term trend of the markets has generally rewarded investors for staying the course.
Posted here on November 10, 2023 by Keith Gangl