Here’s the real cost of timing the market

On days like today, do you find yourself saying, “I wish I bought in yesterday?” Or on days like yesterday do you say, “I really wish I had not just put money to work?”  There’s a real cost to timing the market, and the reality is that if you are someone holding a portfolio of securities, the facts show that you are better off riding it out than giving up on your investments and going to cash.  In a recent research report, LPL Financial Senior Market Strategist Ryan Detrick stated: 

“Although market timing is very alluring to investors, especially after the past few weeks, the reality is timing things incorrectly can set you back significantly. In fact, if you started in 1990 and missed the best day of the year each year for the S&P 500, your annual return was nearly cut in half.” 

Below is a chart, also from LPL. It shows the annualized return for the S&P 500 from 1990 to 2019.  7.7%–It’s the blue bar all the way on the left. That’s for 30 years. Now, over that same time period, if you missed THE ONE SINGLE BEST DAY OF EACH YEAR, that 7.7% return drops to only 3.9%. (See the second bar from the left.)  How about missing TWO of the best days of each year? You would have been up less than 1% a year. (See the third bar from the left…Okay, I can let you take it from here, right?)  Why stop there?    Miss the best three, and you‘re at -1.8% annualized return.  Best five? Boom: -6.8% annualized. ANNUALIZED!  Fine, I’ll do it…I’ll actually mention the most extreme.  If you missed the best 20 days of each year, you’d be down –27% annualized. 

If you are a long-term investor and you don’t need cash out of your portfolio right now, play the odds and just leave your portfolio working for you. The Dow was up almost 11.4% today…miss a day like today and it hurts.  Having some cash as a hedge right now is okay, but when you are all cash and miss one or two big days, you can really impair the performance of your portfolio.  As they used to yell up at parachutists properly oriented into the wind and coming in for a landing at Airborne School, “Hold whatcha got Airborne!” 

Keep looking forward, 

Dave 

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