Anyone who has ever invested in the stock market has thought to themselves, “Is this really the best time to put my hard-earned money into the market?” Or, if you’ve been invested in the market for any length of time, you may have thought to yourself during an especially volatile period, “Can’t I just sit out for a while and get back in after things start to look a little better?” In either case, there is historical data that we can reference to help understand what the best course of action is over the long term. It’s important to note that we’re talking about your long-term money. This is not your bank account money, or your emergency reserve account (which should remain in a liquid and non-volatile investment vehicle). We are talking about your long-term savings that you will rely on to retire, and, eventually, to live comfortably throughout retirement.
As time goes on, we are living longer, healthier lives. We have seen retirement go from something that used to last several years to several decades. We need our resources to keep pace with inflation and taxation over a lengthy period of time if we want to maintain our lifestyle throughout retirement. The best way to do that is with time tested and proven strategies that include the adoption of an appropriate asset allocation for your situation, and then the wherewithal to stick with that strategy in good times and in difficult times. That doesn’t mean you can’t or won’t ever adjust your strategy or your allocation, but it does mean that you are best served to stick with your plan, even when the market is behaving erratically.
To illustrate that point, consider the following:
From January 1, 1980 to June 30, 2022 a hypothetical investment of $10,000 in the S&P 500 would have grown to just over $1,058,002 had the money remained fully invested during that 42-year period. If you missed the 5 best days during that 42-year period, the same $10,000 would have grown to $655,981. If you missed the 10 best days, you would have had a balance of $472,481. Miss the 30 best days, and you are left with only $171,261. Those numbers are shocking, and they should be! By missing a very limited number of the best days in the market, you cut your return drastically. The point of this is to understand that while the market can be volatile on the downside, it can be every bit as volatile on the upside.
If that example didn’t convince you that it’s next to impossible to time the market, consider a study Bank of America conducted going back to the 1930s. In the decades from 1930 to 2020, the stock market returned a positive result in 8 of those 10 decades.
The total return for the stock market over that period of time was 17,715%. If you missed the 10 best days in each decade, the return is reduced to 28%. That’s not a typo. I didn’t forget a few digits. This again illustrates how volatile the market can be on the upside.
A more detailed look at this study further illustrates the point:
The difficulties of trying to time the market
The impact of missing the market’s best and worst days in each decade
The U.S. stock market has been resilient throughout its history. We have seen stocks routinely recover from short-term crisis events over and over. And this time is no different. Current events may come wrapped in different packaging, but the market has always found a way to climb to new highs following every set back. In recent memory, the market came back from the collapse of Lehman Brothers in 2008 and again after a downgrade of the U.S. credit rating in 2011. And who can forget the onset of a global pandemic in 2020 that sent the markets reeling? I could go on and on with examples, but the result in each period is a market that has bounced back and climbed higher.
There is a famous quote that goes something like, “Those who ignore history are bound to repeat it.” At the very least, we should pay attention to history. It is natural to feel unnerved when the market is in the middle of a downturn. We need to fight the tendency to react emotionally when it comes to our long-term investment portfolio. Rather than attempting to predict market highs and lows, it’s important to stay invested through a full market cycle if you want the best opportunity for solid returns. Focus on the time you stay invested, not the timing of your investments.