After more than three months without a single 1% change (up or down) for the S&P 500 Index, volatility came back—and in a big way—this past week.
This brings up an interesting question: What would happen if you could avoid all the big down days for stocks while invested in a portfolio mimicking the makeup of the S&P 500? Of course, no one can really do this, but it’s still a very important exercise for investors to examine on the futility of market timing.
If you could have avoided the 10 worst days of each year for the S&P 500 since 1990, you would have had average annual gains of close to 40%. However, saying you’ll do that—and actually being able to accomplish it—are two totally different things.
What if you missed the 10 best days of the year? Well, in that case, you would have been down on average 12.8% a year since 1990. Per Ryan Detrick, Senior Market Strategist, “Let’s get one thing straight—no one can predict the 10 best or 10 worst days of the year. Although it would be fun to somehow do this, the exercise hammers home that for the average investor, being invested and not making a lot of short-term bets may be the best way to accumulate long-term wealth.”
Here are some key takeaways from this exercise:
- Even if you missed the 10 best days of each year, you still would have been in the green six times (1991, 1995, 1996, 1997, 2013, and 2017).
- Market timing made the smallest difference in your portfolio last year. If you missed the 10 worst days of the year in 2017 your portfolio gained 31.1%, but if you missed the 10 best days of the year your portfolio still rose 8.6%.
- The most volatile days mattered more in 2009. If you missed the 10 worst days in 2009, your portfolio added 88.8% for the year, the largest gain in any year of the exercise. If you missed the 10 best days of that year, your portfolio lost 18.7%.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not bank/credit union obligations and are not endorsed, recommended or guaranteed by any bank/credit union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.