Why Staying Invested Has Beaten Market Timing: Missing the Best Days is Costly

April 15, 2024

It’s not timing the stock market; it’s time in the stock market. This is one of the golden rules of long-term investing.

It’s easy to say this when the market is going up, but you are going to need the reminder when the market goes down again. Remember, stock market gains don’t feel as good as stock market losses even if the amounts are the same.

Why is time in the market so important for investors? Because selling right before the declines and buying right before the gains are nearly impossible to predict. In an interview on Bloomberg’s Master’s in Business, Larry Swedroe, Head of Financial and Economic Research at Buckingham Strategic Wealth, described how hard this is to do:

Barry Ritholtz: I’ve seen some data that suggests you just have to miss the worst couple of days and your performance improves dramatically. What’s wrong with that line of thinking?

Larry Swedroe: The odds of you identifying those days are close to zero. That’s what’s wrong with that. And of course, the other side is also true.  A huge part of the returns happen over very short periods.  And yet it’s virtually impossible to predict. Again, here’s an anomaly.

Both Peter Lynch and Warren Buffett, maybe the two greatest investors of all time, told best investors, you should never try to time the market and neither one of them has ever met anyone who has made a fortune by trying to time the market.

Barry Ritholtz: I’ve also seen some data that suggests that those best days and those worst days come clumped very close together. So if you’re fortunate enough to miss the worst day, the odds are you’re going to miss the best day, also. 

Larry Swedroe: And that’s because again, governments take action, come in and try to counter it. And then, you know, everyone who was panicked and sold now has to, you know, unwind those positions and the shorts have to come in and cover as the market starts to recover.1

The above chart from Wells Fargo Investment Institute reveals the kind of data that Barry and Larry are referring too.2

Missing just the best 10 days of the market can have a significant impact on your investment returns. And the more you miss, the worse it gets.

So much so that over the past 30 years, even if you were in the stock market for 10,000+ days and missed the 50 best days, you’d have a negative return.

Stunning.

You might think: “I’ll just get out when the market is going down really bad in a bear market.” However, attempting to time the market by exiting before bear markets is nearly impossible to execute successfully.

Plus, the stock market’s best days often occur near the worst days. They tend to cluster together. Volatility cuts both ways.

According to Dorothy Neufeld over at Visual Capitalist:

“Over the last 20 years, seven of the 10 best days happened when the market was in bear market territory.

Adding to this, many of the best days take place shortly after the worst days. In 2020, the second-best day fell right after the second-worst day that year. Similarly, in 2015, the best day of the year occurred two days after its worst day.”3

Take an investing lesson from two of the world’s greatest investors. If Peter Lynch and Warren Buffett haven’t met anyone who could get rich timing the market, why try?

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Sources: 

  1. “At the Money: Staying the Course”, April 10, 2024. Accessed online: At the Money: Staying the Course - The Big Picture
  2. “The perils of trying to time volatile markets”, February 29, 2024. Accessed online: Perils of Timing Volatile Markets | Wells Fargo Investment Institute
  3. “Timing the Market: Why It’s So Hard in One Chart”, August 14, 2023. Timing the Market: Why It’s So Hard, in One Chart