Dorothy Neufeld of Visual Capitalist asserts1, "Timing the market seems simple enough: buy when prices are low and sell when they’re high." However, she goes on to emphasize that actual evidence suggests that market timing is far from simple. Many investors end up selling prematurely, only to miss out on subsequent rallies. Furthermore, investing during market downturns can be nerve-wracking.
Neufeld references a graphic derived from 20 years of JP Morgan data, illustrating the potential downside of attempting to time the market. The clear takeaway is that by merely missing out on a few of the market's best days, investors can significantly undermine their portfolio’s potential returns.
Detailing the consequences of market timing, Neufeld offers an intriguing comparison: she showcases how a $10,000 investment in the S&P 500, held from January 1, 2003, to December 30, 2022, would have performed under various scenarios:
Invested All Days: Portfolio Value - $64,844; Annual Return (2003-2022) - +9.8%
Missed 10 Best Days: Portfolio Value - $29,708; Annual Return - +5.6%
Missed 20 Best Days: Portfolio Value - $17,826; Annual Return - +2.9%
Missed 30 Best Days: Portfolio Value - $11,701; Annual Return - +0.8%
Missed 40 Best Days: Portfolio Value - $8,048; Annual Return - -1.1%
Missed 50 Best Days: Portfolio Value - $5,746; Annual Return - -2.7%
Missed 60 Best Days: Portfolio Value - $4,205; Annual Return - -4.2%
From this data, Neufeld highlights, "the original investment grew over sixfold if an investor was fully invested for all days." Missing just the 10 most lucrative days would erode over 50% of the final portfolio value. If one missed 60 of the best days, they would see a loss of a staggering 93% in value compared to if they had remained invested throughout. As Neufeld states, a simple buy-and-hold approach would have garnered almost 10% in average annual returns. Conversely, once an investor missed the 40 most optimal days in this period, their returns dipped into the negatives.
Neufeld raises the question: why is market timing so challenging? She offers some insights: "Often, the best days take place during bear markets." To support this, she lists the top 10 best performing days over the past two decades:
Oct 13, 2008: +12%
Oct 28, 2008: +11%
Mar 24, 2020: +9%
Mar 13, 2020: +9%
Mar 23, 2009: +7%
Apr 6, 2020: +7%
Nov 13, 2008: +7%
Nov 24, 2008: +7%
Mar 10, 2009: +6%
Nov 21, 2008: +6%
Neufeld comments, "Over the last 20 years, seven of the 10 best days happened when the market was in bear market territory." She also remarks on the proximity of the best and worst days, citing examples from 2020 and 2015.
In conclusion, Neufeld underscores the benefits of staying invested. The best trading days frequently occur amidst market tumult and heightened volatility. Missing these days could mean forgoing significant returns over the long haul. Market timing not only demands skill but also the right temperament and a consistent record. As Neufeld wisely points out, "If there were bullet-proof signals for timing the market, they would be used by everyone."
Footnotes:
1 Adapted from source: Neufeld, Dorothy. "Timing the Market: Why It’s So Hard, in One Chart." Visual Capitalist, 14 Aug. 2023, www.visualcapitalist.com/chart-timing-the-market.
