Not surprisingly, I've had a lot of conversations about investment portfolios over the last month. Reactions to recent market performance has ranged from "sell everything!" to discussion of borrowing money to invest. A common thread for both risk adverse and risk seeking investors is the concept of "timing the market", or trying to buy and sell in such a way to beat what regular returns might looks like.
The problem with timing the market is that it's really hard to do. There's a great study that illustrates this point by calculating total return if you missed the best 10 days in the market over a 20 year time frame versus an investor who stayed invested through the ups and downs.
The last published numbers examined market returns from January 1, 1999 to December 31, 2018. An investor who stayed fully invested in the S&P 500 over that time frame would have had an average annual performance of 5.62%, but an investor who missed the best 10 days would have only had an average annual return of 2.01%, which is actually lower than the average inflation rate over that same period of time.
Given that we're in the midst of a market downturn, I was curious how these numbers have held up during the COVID-19 crisis, and since I'm stuck home with some extra time on my hands, took a minute to update these calculations using more recent data: April 1, 2000 to March 31, 2020. The results were even more startling: investors who stay in the S&P 500 this whole time period had an average annual return of 3.6%, while investors who missed the best 10 days in the S&P 500 had an average annual return of -1%. That's right: they LOST money over that 20 year period.
Part of the conundrum is that the best days usually follow the worst days. Consider this: 3 of the best days and 3 of the worst days over the last 20 years happened in March of this year. The proximity of these market swings is startling, and an investor who spooked and sold during the first third March would have missed out on 3 of the best performing days over the last twenty years.