Advocates of buy-and-hold stock investing make a strong case as to why it can be disastrous for a novice investor to try to time the stock market. It’s been shown that frequent trading generates higher fees, and that emotional trading leads to buy-high, sell-low behavior. Also, every time you trade an individual stock, you’re betting that you know more than the Wall Street experts and their high-frequency trading algorithms.
Those are good reasons, and they make a strong case for adopting a simple investing strategy, focused on index funds, that you can stick with through good times and bad. But it wasn’t until recently that I learned of another compelling reason to believe in the buy-and-hold strategy: There have historically been only a handful of great days for the stock market every year. And if you miss even a handful of them because you’re trying to time the market, you will dramatically lower the overall return on your investments.
I’ve also been pondering how the same idea can be applied to other areas of life. How much worse would my life be if I missed the best days every year? Maybe if I apply the my investing methodology to my life strategy as a whole I can be a happier person. I need to prioritize being present at rare and meaningful life events to maximize my happiness.
Market Days You Don’t Want to Miss
The stock market can be a wild ride. Swings of 30% in value during short but volatile periods are not uncommon. When times get rocky, there can be daily percentage changes of 15% or more in either direction. So, what would happen if you tried to time the market and ended up missing out on the days with the biggest positive changes?
Long story short, it’s not good.
Here’s what Fidelity found when they crunched the numbers on what would happen to a hypothetical $10,000 investment into an S&P 500 index fund from 1980 to 2018 if you missed the best five market days.
(Note: They disregard taxes and fees for simplicity.)
Missing the five best days when you’re otherwise fully invested drops your overall return by 54%! And the results only get worse the more good market days you miss. Once you miss out on the 50 best-performing days, you might as well have been investing in the Juicero instead of the stock market.
The above chart tracks a 38-year period, or roughly 10,000 days of stock trading. So, if you think you can time the market, you’re betting that you can get in and out without missing just five of those 10,000 days — which could happen at anytime. To an average Joe like me, it seems far simpler to just stay invested rather than take on those odds.
Another good reason to stay invested is that the majority of the best stock market days throughout history have come in the midst of significant market downturns. Of the top 10 biggest gaining days, six occurred during the chaos of the early 2000s tech bust or the 2008 Great Recession. Even though it can be hard, it’s crucial to avoid panic selling when the market struggles. As the saying goes, “It’s all about time in the markets, not timing the markets.”
Life Days You Don’t Want to Miss
Much like with the stock market, it’s my opinion that there are certain days in our lives that have a disproportionately greater positive impact than the average day. I am not a father, but I’d hazard to guess that being present for the birth of a child boosts happiness more than about a zillion days spent slogging away at spreadsheets in the office. I think the same principle applies for weddings, championship sporting events, family reunions, epic vacations, anniversaries, and any other rare but momentous occasion.
I imagine that missing out on even a few of those days each year boosts stress and decreases overall well being. I can’t prove it with a bar chart as clean and obvious as the one for stock investing, but it makes intuitive sense.
Take my recent decision regarding whether to attend a friend’s bachelor party as an example. He’s a good friend, and presumably he’ll only be getting married once. This was my one chance to be part of an event that all involved would remember for a lifetime. I declined, justifying my decision by saying the trip required a flight and was too expensive.
There is no rulebook for this kind of decision. If you’re on a budget, there are going to be trade-offs and sacrifices. But, all in all, I regret not going. I’m not losing sleep over it, but I do view it as a mistake. As life marches on, the chance to spend quality time with old friends diminishes fast. If I look at my friendship in investing terms, missing the party feels like missing out on a large single day stock run up.
I also failed to consider all the other hard-to-quantify aspects of participating in the bachelor party. For instance, attending would have allowed for a uniquely great opportunity to form bonds with multiple people who lived near me. This could have potentially bolstered both my personal and professional network. Recent surveys have shown that as many as 85% of jobs are filled through networking, so it could have even helped in future job searches.
It’s impossible to parse all the different “what-ifs,” so in the end I’m left with a simple rule of thumb: If your gut is telling you not to miss something, and it’s not extremely cost prohibitive to attend, don’t miss it. Simple as that. The money stuff will work itself out.
And that’s just for the life events you know about; some of the best moments of our lives seemingly sprout from nowhere on random Tuesday afternoons and serendipitous Saturdays. That’s one more reason not to bother trying to time the market: It’s just one more distraction that can keep you from being present in everyday life. You don’t want to miss out on life’s unexpected and joyful memories because you’re too busy fiddling with your investment account.
Summing Up
Both life and the stock market have ups and downs. If you can do your best to not miss the “best” days in either case, you’ll be both wealthier and happier. That’s a winning combo, and it’s worth structuring your investments and your life to bring about that result.
More by Drew Housman:
- Six Investing Tools to Hone Your Perfect Portfolio
- How Delaying Retirement – Even for Just a Few Months – Can Help Erase a Savings Shortfall
- The Most Motivating Financial Chart I’ve Ever Seen
The post Trying to Time the Market? Missing Just a Handful of the Best Days Can Tank Your Returns appeared first on The Simple Dollar.
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