The Market Bottom Isn’t All It’s Cracked Up To Be

The Market Bottom Isn’t All It’s Cracked Up To Be
Theodora Lee Joseph, CFA

over 1 year ago1 min

Mentioned in story

When the market is falling with no end in sight, it’s tempting to close your positions and wait to get back in again when things start looking chirpier. But it’s important to remember how difficult it is to time the market, and you might end up hurting your returns if you try.

Just look at the chart on the left, which depicts two scenarios: the average return you’d have made if you’d invested in the S&P 500 over a three-year period between 1988 and 2021, and the average return you’d have made if you’d dipped out and missed the best five days of the period. If you’d adopted a buy-and-hold strategy that exposed you to the market on its best days, you’d have made an average of 11% a year over the three years. If you’d been flighty and missed out on them, you’d have made just 4%.

The chart on the right shows the same principle, but over the first six months of this year. Of course, it would’ve been better for you not to have been invested at all: the worst five days have single-handedly been responsible for the majority of the stock market’s decline. But if you were invested, you’d have been better to stay invested: you’d only have been down 20%, compared to the 30% you’d have been down if you’d tried and failed to pick the best days.

The lesson is simple: timing the market is hard, and it pays to be patient. So when the market is as volatile as it is now, it’s important to check back in on your investment thesis and remember why you bought the stocks you did in the first place. If your reasons are still sound, there’s no need to do anything at all.



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