The S&P 500 has shown a 14% increase this year, primarily due to just eight specific days that explain most of these gains. If you're seeking a straightforward example of why attempting to time the market is an ineffective investment strategy, examine the S&P 500 year-to-date performance.
Nicholas Colas at DataTrek points out that this year has seen only 11 more days with gains than losses (113 up days and 102 down days), yet the S&P 500 has risen by 14% year-to-date. It might be puzzling that the S&P has surged 14% despite a nearly equal number of up and down days. Simply attributing this to a "rally in big cap tech" doesn't capture the full picture.
Colas identifies eight specific days that can account for most of the gains, each related to significant events in the year, such as big tech, the banking crisis, interest rates, Federal Reserve actions, and recession avoidance:
S&P 500: Most significant gains this year
The good news is that these major issues (big cap tech, interest rates, recession avoidance) continue to be relevant and are likely catalysts for further U.S. equity gains, according to Colas. The bad news is that if you were not invested in the market on these eight crucial days, your returns would be significantly lower.
Colas illustrates a well-known problem among stock researchers: market timing, the belief that one can predict stock price movements and act accordingly, is not a successful investment strategy. This holds true not only for 2023 but for every year.
In theory, buying when stocks are down and selling when they're high, repeatedly, seems ideal. However, consistently identifying market peaks and troughs has proven elusive, and missing the most significant days can harm long-term portfolio returns significantly.
The statistics reveal the magnitude of this issue. Missing just one day, the best day, in the last 50 years would mean you have over $14,000 less, which is a 10% reduction. Missing the best 15 days translates to a 35% reduction in returns. This concept works in reverse, as avoiding the worst days would lead to higher returns, but predicting those days is impossible.
Why is market timing so challenging? Because you must be correct twice: when entering and exiting the market. The probability of making both decisions correctly and outperforming the market is exceedingly low. This is why the strategy of investing in indexed funds and remaining invested in the market has gained popularity over the past 50 years. Successful investing depends on consistent contributions and understanding your own risk tolerance, not on trying to time the market.
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