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Don’t time the market, even in volatile periods.

MAR. 17, 2020

Global stock markets are in the midst of a near-unprecedented period of volatility in reaction to the worldwide coronavirus pandemic. The S&P 500® Index (benchmark for the U.S. stock market) either rose or fell over 2.5% for 12 consecutive market sessions through Friday, March 13. To put that volatility in perspective, the prior 12 months before the COVID-19 outbreak saw only two such days for the S&P 500.

Over the past 25 years, there have been roughly ten similar periods of heightened volatility and market shocks in the U.S. stock market. In each of those instances, investors have experienced a sense of helplessness, which often tempts them to sell all their equity holdings. While this is a natural and understandable emotion, it ignores the fact that falling markets often contain some of the best days along with some of the worst days.

bar chart of Time in the market, not timing the market

Timing the market is difficult because it requires an investor to be right not only on the way out but also on the way back in. The chart above illustrates how a market timing strategy for the S&P 500 would have performed for a hypothetical $10,000 investment from 1999 to 2019. If the investor held the $10,000 investment held through the entire, period, she would have $22,201 at the end of last year (excluding dividend reinvestment). If she had chosen to time the market and missed just ten of the best trading days (out of 5,031 days total), her ending balance would have been half of that, at $11,088. If she missed the best 50 days, her ending balance would be $2,231, or roughly 10% of what she would have had if she followed a buy-and-hold strategy.

Staying invested during sharp market declines can induce stress, but investors with long-term investing horizons are often rewarded by demonstrating patience and resolve.

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