“Stay invested.”
It’s a lesson financial advisors the world over preach to clients on a near-constant basis. Keep the money you’ve invested in financial markets in financial markets.
But there are only so many opportunities for investors to see successful applications of this lesson play out.
Market events before, during, and after the 2016 presidential election, however, provided a textbook example of why time in the market is more important than timing the market.
Up, down, and back up again
As a Donald Trump victory came into focus for financial markets on Tuesday night, markets began sliding. Near midnight eastern, Dow futures were down 800 points. S&P 500 futures hit their limit-down level after falling 5%.
By the time markets closed on Wednesday afternoon in New York, however, stocks had recovered all of these losses and then some, with the Dow gaining 250 points by the closing bell to extend a winning streak to three days.
By Thursday morning, markets were trying to make sense of this market rally. Near noon eastern on Thursday, markets were mixed.
In markets, life comes at you fast.
The oldest lesson in the book
Successful long-term investing is not about timing the market but maximizing your time in the market.
“Investors often think they should move in and out of financial markets, trying to time the buying/selling of stocks based on a series of events, or increasing/decreasing their bond exposure depending on expectations for interest rates,” write Bank of America Merrill Lynch strategists Martin Mauro and Cheryl Rowan.
“History shows the value of staying invested in bonds for the income generated regardless of rates, and proves the rewards of staying invested in stocks despite periodic market declines.”
And what work from Mauro and Rowan’s colleagues on BAML’s stock research team shows is that while investors might want to avoid big declines by selling during uncertain times, the more painful outcome is missing the big gains.
This table from BAML shows the dramatic impact missing the 10 — 10! — best days per decade can have on your portfolio. It is massive.
As we see, in the 1980s, the S&P 500’s price return was 227%. If you leave out the 10 best days, the price return is a still respectable 108%.
But this is the difference between ending the ’80s with a balance of $32,700 vs $20,800 on a hypothetical $10,000 investment. (Caveats:There are fees, you wouldn’t likely invest on Jan. 1 and cash out of Dec. 31, etc. etc. This is just a hypothetical.)
And while this difference matters for an investment spanning just the 1980s, the even bigger difference is going forward.