This is further complicated by the fact that much of the market’s gains are realized in a small number of days.
Trying to avoid the inevitable market movements causes investors to miss out on the best daily returns because they often occur in the days following periods of market declines and volatility. These “best day” misses compound over the years and can amount to a significant reduction in long horizon wealth.
IMPACT OF MISSING THE BEST DAYS IN THE STOCK MARKET (1974 – 2015)
Source: Fama & French daily market returns
To illustrate, consider stock market returns from 1974 through 2015. This period encompasses some very big market movements, including 1987’s Black Monday (down 22% in one day!), 2000-2002 (down 46%), and 2007-2009 (down 52%).
But the investor that stays fully invested over this period benefitted by reaping an annual compound return of 11.0% and ends up with $800,000 on an initial $10,000 investment. On the other hand, missing just the three best days each year during that period actually produces a negative 1.2% annual compound return, decreasing the initial investment to a final value of $6,000.
AthenaInvest believes that building wealth is a long-term endeavor and requires time as well as discipline, specifically the ability to manage one’s emotions. The equity market pays investors a premium over cash and bonds precisely because it requires investors to endure the swings in the market. Selling to avoid the downturns more often than not means you’ll miss the upside moves that lead to long-term gains.
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