By Ee Hsin Kok. Edited by Arjun Chandrasekar.
Since 1926, the S&P 500 has had an average annual return of 10 to 11%. That means that $1,000 dollars invested into the S&P 500 in 1926, would be worth over $8,556,676 today. And this is despite some of the biggest market declines including the Great Depression, World War II, Black Monday, the Dot-Com crisis, the 07-08 financial crisis, and the 2020 Stock Market Crash. But now imagine this: what if you had sold near the top of every crash and bought back near the bottom, how much more could you have made?
Why People Try to Time the Market
Say you bought $10,000 of SPY (an S&P 500 ETF) in January 2019 and held it to today. That $10,000 would have grown to about $18,000 as of August 2021. But what if you bought $10,000 in January of 2019, sold in Feb of 2020 right before the covid crash, and bought back in near the bottom at the start of April? Well, that $10,000 would have grown to $23,000 as of August 2021. Significantly more!
It seems like there are great incentives to timing the market. After all, one is able to extract significantly more performance by selling at the top and buying near the bottom. But while it is true that timing the market can significantly increase returns, there is a big elephant in the room that hasn’t been addressed yet – how do you know when the market has topped or bottomed? Well, the answer is you can’t!
The reality is that markets are volatile in the short term and extremely chaotic. No one can truly predict when the market has topped, or when it has bottomed. And if you think any differently, try playing the “time the market game”, which you can visit here, and compare your performance to a buy and hold strategy.
Missing Out On Returns
While some people think that not timing the market causes them to miss out on returns, it is actually the opposite that is true. To illustrate how dangerous it is to be out of the market, take a look at this table.
|From January 4, 1999 to December 31, 2018 (S&P 500 index)||Value||Annualized Performance|
|Missed 10 best days||$14,895||2.01%|
|Missed 20 best days||$9,359||-.33%|
|Missed 30 best days||$6,213||-2.35%|
If an investor had missed just the best 20 days of the market from 1999 to 2018, they would not have even netted a positive return!
Conclusion While successfully timing entries and exits from the markets can yield great returns, don’t be fooled into thinking you can always do it. Many have tried and many have failed, and your chances are no different! But you don’t have to time the market to make great returns. The natural 10-11% long-term gains from the market are enough to beat inflation and grow your wealth. It’s not glamorous or cool to watch your investments and do nothing, but it’s easy and effective. Always remember the best and worst days in the market can never be predicted, so time in the market beats timing the market.