A day that brings money or timing in trading
Market timing seems simple enough: buy when prices are low and sell when prices are high.
But there is clear evidence that time-to-market is difficult. Investors often sell stocks early, missing out on an opportunity for the stock market to rise. Investing when the market is flashing red can also be frustrating.
On the contrary, investing through highs and lows brings competitive returns, especially over longer periods.
The figure above shows how trying to time the market can drive down the value of your portfolio using 20 years of JP Morgan data.
| Portfolio value | Annual income (2003-2022) | |
|---|---|---|
| Invested all days | $64,844 | +9.8% |
| Missed Top 10 Days | $29,708 | +5.6% |
| Missed 20 best days | $17,826 | +2.9% |
| Missed 30 best days | $11,701 | +0.8% |
| Missed 40 best days | $8048 | -1.1% |
| Missed 50 Best Days | $5746 | -2.7% |
| Missed 60 best days | $4205 | -4.2% |
As can be seen from the table above, the initial investment increased more than six times if the investor fully invested all days.
If an investor were to simply miss the top 10 days in the market, they would lose over 50% of the value of their end portfolio. The investor would have ended up with a portfolio of just $29,708 compared to $64,844 if they had just stayed put.
Even worse, if they missed the top 60 days, they would lose an astonishing 93% of the value of what the portfolio would be worth if they just kept investing.
In general, an investor would earn almost 10% of the average annual return using a buy and hold strategy. The average yearly return moved into negative territory after it missed the top 40 days in the specified time frame.
Risks and benefits of market timing
Market timing seems simple enough: buy when prices are low and sell when prices are high.
But there is clear evidence that time-to-market is difficult. Investors often sell stocks early, missing out on an opportunity for the stock market to rise. Investing when the market is flashing red can also be frustrating.
The figure above shows how trying to time the market can drive down the value of your portfolio using 20 years of JP Morgan data.
Market Timing Pitfalls
Incorrect definition of the market, even for just a few days, can significantly affect the profitability of an investor.
The following scenarios compare the total return on a $10,000 investment in the S&P 500 between January 1, 2003, and December 30, 2022. In particular, it highlights the impact of skipping the best days in the market versus sticking to a long-term investment plan. .
| Portfolio value | Annual income (2003-2022) | |
|---|---|---|
| Invested all days | $64,844 | +9.8% |
| Missed Top 10 Days | $29,708 | +5.6% |
| Missed 20 best days | $17,826 | +2.9% |
| Missed 30 best days | $11,701 | +0.8% |
| Missed 40 best days | $8048 | -1.1% |
| Missed 50 Best Days | $5746 | -2.7% |
| Missed 60 best days | $4205 | -4.2% |
If an investor were to simply miss the top 10 days in the market, they would lose over 50% of the value of their end portfolio. The investor would have ended up with a portfolio of just $29,708 compared to $64,844 if they had just stayed put.
Even worse, if they missed the top 60 days, they would lose an astonishing 93% of the value of what the portfolio would be worth if they just kept investing.
In general, an investor would earn almost 10% of the average annual return using a buy and hold strategy. The average yearly return moved into negative territory after it missed the top 40 days in the specified time frame.
Best days on the market
Why is market time so difficult? Often the best days are in bear markets.
| classify | date | Come back |
|---|---|---|
| 1 | October 13, 2008 | +12% |
| 2 | October 28, 2008 | +11% |
| 3 | March 24, 2020 | +9% |
| 4 | March 13, 2020 | +9% |
| 5 | March 23, 2009 | +7% |
| 6 | 6 Apr. 2020 | +7% |
| 7 | November 13, 2008 | +7% |
| 8 | November 24, 2008 | +7% |
| 9 | March 10, 2009 | +6% |
| 10 | November 21, 2008 | +6% |
Over the past 20 years, seven of the top 10 days have happened when the market was in bear market territory.
Also, many of the best days happen shortly after the worst days. In 2020, the second best day fell right after the second worst day this year. Similarly, in 2015, the best day of the year came two days after the worst day.
Interestingly, the worst days in the market usually happened in bull markets.
Why saving investments is beneficial for investors
Historical data shows that the best days are during market turmoil and periods of increased market volatility. By missing out on the best days in the market, an investor risks missing out on a significant increase in returns in the long run.
Timing the market requires not only considerable skill, but also temperament and experience. If there were accurate signals for determining the time of the market, everyone would use them.