Investors in the SPDR S&P 500 ETF (SPY) have experienced a notable 28% return over the past year. However, those who attempted to time the market by selling during April’s surge in the VIX—a measure of market volatility—near 30, would have missed the subsequent recovery and the potential to achieve that gain. According to data from Fidelity, a $10,000 investment that remained fully invested from 1988 to 2023 grew to an impressive $417,995. Yet, missing just the five best trading days in that timeframe drastically decreased the final returns to $264,000. In an even more dramatic scenario, avoiding the fifty best days resulted in a mere $32,000, reflecting a staggering 92% loss of potential gains.
This phenomenon highlights the clustering of equity market returns, which are often concentrated on a few key trading days—specifically near market bottoms when fear is heightened. Such timing makes it nearly impossible for most investors to accurately determine when to enter and exit the market.
Co-host Bo Hanson on a recent episode of the Money Guy Show emphasized the harsh realities of market timing. He reiterated the significance of remaining invested, as only a small number of trading days account for the majority of long-term gains. Analysing Fidelity’s data, Hanson showcased how missing the best days severely impacts overall returns—illustrating, for instance, that with a fully invested portfolio, $10,000 could turn into $417,995 over 12,775 trading days. Conversely, skipping just the five best days would reduce that amount to $264,000—effectively losing around $154,000 by remaining out of the market for less than a week.
The underlying reason behind the challenges of market timing stems from the V-shaped recoveries typical in equity markets. Selloffs often conclude abruptly without any clear signal, and substantial gains frequently occur within days following significant losses, amidst prevalent negativity. This trend was evident in the previous year when the VIX peaked in mid-April before normalizing by late May. Investors who chose to panic-sell during this turbulent period needed to accurately predict not only the exit point but also the appropriate moment to reenter the market, which proved to be a challenge. The S&P 500 ETF’s 28% increase over the year serves as a reminder of the potential pitfalls associated with trying to time market fluctuations.
Research corroborates the challenges of identifying the right trading days. Data from SPIVA reveals that 90% of active U.S. large-cap managers underperformed the S&P 500 over the last 15 years, despite having extensive resources and expertise. Given this lack of success among professionals, it raises questions about the likelihood of part-time traders effectively avoiding down days while capitalizing on upswings.
For those seeking a more stable investment approach, the following steps are recommended:
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Automate Contributions: Establish automatic transfers to your brokerage account on payday to prevent impulsive selling decisions.
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Document Equity Allocation: Record your current equity allocation along with the date. When market volatility rises, revisit this note to reassess any potential changes.
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Run Missed Days Analysis: Use available resources to analyze the S&P 500’s daily returns, focusing on the best days and understanding their frequency.
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Limit Trading Activities: If compelled to trade, consider capping it to a small percentage of your portfolio—around 5%—and regularly compare performance against a benchmark.
In summary, the data shows that attempts to time the market can significantly diminish financial returns, even if investors miss just a handful of days over a lifetime. Rather than focusing solely on stock selection, considering strategies for retirement income could provide a more substantial benefit as investors transition to relying on their assets.
