The debate on whether investors can successfully time the market is fascinating.
The “buy and hold” folks believe the market trends up over the long-term and fancy attempts to squeeze out extra profit are fruitless.
“Market timers” think they can improve on market returns by predicting big moves and trading accordingly.
The market has been on a steady march North for years and recent rumbles about trade wars and rising interest rates have some people thinking about getting out while the getting is good.
I found several interesting articles to share that make compelling arguments in favor of the buy and hold camp. Both cite studies covering a period capturing both the dotcom and housing market bubbles and subsequent crashes.
The basic premise of both is that missing out on the best days in the market is bad for your long-term returns. Duh. The surprising part is that missing out on just a handful of the very best days really kills performance. Food for thought: during the 20-year period from 1994 to 2013 the market’s average annual return was 9.22%. If you sat out just five of the top days your annual return would have been reduced to 7.00% which translates to 40.62% less profit!
The article by the Motley Fool covers an additional piece of the puzzle: many of the most significant down days usually occur within two weeks of large up days. The takeaway: missing out on a few of the very best days in the market kills your performance and jumping out of the market after big down days greatly increases your chances of missing crucial up days.
This lines up well with our philosophy. If you are appropriately invested your portfolio will weather big drops and be in the game when the big up days come around. Now if we could just predict the big down days…
The downside of sitting it out
Timing of best days and worst days
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