Visual Capitalist: Timing The Market
The Risks and Rewards of Timing the Market
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Timing the market seems simple enough: buy when prices are low and sell when they’re high.
But there is clear evidence that market timing is difficult. Often, investors will sell early, missing out on a stock market rally. It can also be unnerving to invest when the market is flashing red.
By contrast, staying invested through highs and lows has generated competitive returns, especially over longer periods.
The above graphic shows how trying to time the market can take a bite out of your portfolio value, using 20 years of data from JP Morgan.
The Pitfalls of Timing the Market
Mistiming the market even by just a few days can significantly affect an investor’s returns.
The following scenarios compare the total returns of a $10,000 investment in the S&P 500between 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.
| Portfolio Value | Annual Return (2003-2022) | |
|---|---|---|
| Invested All Days | $64,844 | +9.8% |
| Missed 10 Best Days | $29,708 | +5.6% |
| Missed 20 Best Days | $17,826 | +2.9% |
| Missed 30 Best Days | $11,701 | +0.8% |
| Missed 40 Best Days | $8,048 | -1.1% |
| Missed 50 Best Days | $5,746 | -2.7% |
| Missed 60 Best Days | $4,205 | -4.2% |
Over the last 20 years, seven of the 10 best days happened when the market was in bear market territory.
Adding to this, many of the best days take place shortly after the worst days. In 2020, the second-best day fell right after the second-worst day that year. Similarly, in 2015, the best day of the year occurred two days after its worst day.
Interestingly, the worst days in the market typically occurred in bull markets.
Why Staying Invested Benefits Investors
As historical data shows, the best days happen during market turmoil and periods of heightened market volatility. In missing the best days in the market, an investor risks losing out on meaningful return appreciation over the long run.
Not only does timing the market take considerable skill, it involves temperament, and a consistent track record. If there were bullet-proof signals for timing the market, they would be used by everyone.
Source: https://www.visualcapitalist.com/chart-timing-the-market/