27 December 2023
At first glance, it is easy to understand why some investors believe that time in the market during difficult times is more costly than time out of the market. What do we mean by this?
Ideally, all investors would be in the market and fully invested when moving upwards, out of the market and fully disinvested when moving downward. However, over time, you will notice that it is time out of the market, which is the most dangerous and can significantly impact your long-term returns.
Taking information from the Visual Capitalist website, there is a fascinating chart about being fully invested and trying to time your investments. As the US is the largest market in the world, the data relates to the S&P 500 index between 2003 and 2022. The concept is the same globally, but there is more information about US markets, so we will use this as a basis.
In this example, we will look at an investment of $10,000 in 2003 and the return, taking into account investment timing, up to 2022. The results will astound you!
If you invested $10,000 and left it in for the entire period, this would have grown to $64,844, a huge return!
Timing can be expensive!
We will now look at scenarios where investors try to time there trading, in and out, and the impact on investment returns:-
If you missed the best ten trading days during the period in question, your initial investment would have been worth $29,708. This is a more than 50% reduction in your overall return, huge, but it gets worse!
Trying to time your trades over the 19 years would make it easy to miss 20 of the best trading days. In this scenario, your $10,000 investment would only be worth $17,826 at the end of the period.
Many traders take a proactive approach and seek to withdraw their investments at the first sign of trouble. Research shows that the best market days often occur close to some of the worst. If you missed the best 30 trading days, your $10,000 investment would be worth just $11,701 at the final reckoning.
This is where it starts to get even more serious; your initial investment of $10,000 would be worth just $8048, leading to a loss over the 19-year period.
If you were to miss the 50 best trading days over the 19-year period, a fraction of the total trading days, your original $10,000 investment would be worth just $5746.
The impact on your initial capital is significantly greater the more of the "best trading days" you miss. If you were to miss 60 of the best trading days, your initial $10,000 investment would be worth just $4205.
The problem with trying to time your investments is not necessary when to disinvest, which can very often be obvious, but many people struggle with timing to put their funds back into the market. Some of the best market days often occur very close to the worst trading days; therefore, if you are hesitant, you can very easily miss an up trend, which can have a considerable impact on your compound long-term returns.
The consensus in the investment world is that long-term investment strategies tend to do better than short-term, timing-based approaches. Obviously, many day traders and short-term traders create significant returns on their initial investments but this is a particular skill and one trade can undo so many good ones. However, as a long-term investor looking to trade the market, missing just a handful of good trading days can be costly.
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