The Potential Cost of Trying to Time the Stock Market

Alina Myakota |

Attempting to time the market might sound straightforward – buy when prices are low and sell when they're high. However, substantial evidence suggests that market timing is a challenging endeavor. Frequently, investors end up selling prematurely, thereby missing out on potential stock market upswings. Additionally, investing during periods when the market appears turbulent can be anxiety-inducing.

Conversely, maintaining your investments through market highs and lows has historically yielded competitive returns, particularly over extended timeframes.

The Challenges of Market Timing

The following scenarios compare the total returns of a $10,000 investment in the S&P 500 between January 1, 2003, and December 30, 2022. Specifically, it highlights the impact of missing the best days in the market compared to sticking to a long-term investment plan.

As we can see in the above table, the original investment grew over sixfold if an investor was fully invested for all days.

If an investor were to simply miss the 10 best days in the market, they would have shed over 50% of their end portfolio value. The investor would finish with a portfolio of only $29,708, compared to $64,844 if they had just stayed put. Making matters worse, by missing 60 of the best days, they would have lost a striking 93% in value compared to what the portfolio would be worth if they had simply stayed invested.

The Advantages of Staying Invested

As historical data indicates, the most favorable market days tend to occur during periods of market turbulence and increased volatility. By not participating in these best-performing days, an investor faces the potential of missing out on significant long-term returns. Although market fluctuations can instill a sense of unease. It's essential to recognize that markets follow cyclical patterns. Throughout history, even in the face of downturns, markets have demonstrated resilience and eventual recovery.

Effectively timing the market demands not only skill but also emotional temperament and a consistent track record. It is crucial to take advantage of the best days in the market and align your investments accordingly to reduce the potential risks in the future. If there were foolproof market-timing signals, they would be universally embraced.