Are you feeling jittery every time the stock market takes a sudden downturn? It’s only natural to have the urge to take action, but acting on impulse could be a costly mistake. Research shows that missing out on just a few of the best trading days can have a massive impact on your long-term returns.
So, before you make any rash decisions, let’s take a closer look at the facts and see why it’s important to stay the course, even when the market gets rocky.
Long Term Cost
As illustrated in the chart below, failing to capture just the top 10 trading days can have a significant impact on long-term returns.
For instance, consider an individual who invested $1 million in US stocks 25 years ago and maintained a fully invested position. Today, their investment would be worth an impressive $6.4 million. In contrast, if the same investor had missed the 10 best trading days during that time frame, their investment would be worth less than half of that amount, at just $2.9 million.
This highlights the substantial difference that a few missed opportunities can make over the course of a long-term investment horizon.
Missing the Worst Days
One counterargument that I often encounter when presenting this data is, “But what if I miss the worst days?” The problem with this is by trying to miss the worst days investors are very likely to miss the best days.
This was clearly demonstrated during the volatile period of March 2020, when the market experienced a sharp decline of -9.51% on March 12th, only to rebound the very next day with a gain of 9.29%. It’s extremely challenging to time these significant one-day movements.
Looking back at historical data, it becomes clear that many of the stock market’s best days and worst days occur in close proximity to each other. Below are the best and worst days since 1950:
As we can see, there have been several instances where the market experienced significant gains and losses in close succession. Many of these events took place during down markets such as the 2008 financial crisis, the dot-com crash, Black Monday, and the Covid crash.
Bottom Line
As advisors, our role is to guide individuals and families in maintaining consistency with their investment strategy guidelines and discipline, for both existing and future investments. It is important to avoid the temptation of going all in or out of the market, as it can be costly long term. Remember that missing just a handful of the best trading days can have significant long-term consequences.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Disclaimers and Sources:
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. We suggest speaking with your financial professional about your situation prior to investing.
