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It may be tempting for some investors to “time” the market in order to enhance returns in times of market volatility or to avoid exposure on days of anticipated losses in the equity market. However, this strategy can prove detrimental to a portfolio that compounds over time.
This week’s Chart of the Week shows the cumulative effect of missing out on the 5 best days and 10 best days of return for the S&P 500. If $1 were invested in October of 1988 and simply left alone, the investor would have $20.88 as of August 22nd, 2019. However, if out of a sample of 7,771 days, solely the 5 and 10 best days of return were missed as a result of not being invested in the S&P 500, the investor would have $13.95 and $10.50, respectively. Investors may be tempted to time the market in the short-term but making a wrong timing decision can drastically impact returns as shown in the chart above. It is nearly impossible to predict how the market will react on any given day and attempting to move in and out of the market incurs trading costs as well as the risk of losing out on a few crucial days of return. Compounding returns also widen the gap between the lines over time and exponentially affects the dollar value of a portfolio. This illustrates the importance of staying invested, especially through periods of high volatility when large swings in returns are more common.
The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
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