In a recent piece for The Motley Fool, Morgan Housel offers some interesting data on why trying to time the market is so dangerous.
“There have been about 21,000 trading sessions between 1928 and today. During that time, the Dow went from 240 to 13,000, or an average annual growth rate of 5% (this doesn’t include dividends),” Housel writes. “If you missed just 20 of the best days during that period, annual returns fall to 2.6%. In other words, half of the compounded gains took place during 0.09% of days.”
Of course, as Housel notes, “Every time that stat is used, someone says, ‘Sure, but what if you missed the worst 20 days?'” And, he says, missing the worst 20 days would indeed lead to big-time returns, with the average annual return jumping to more than 7% (before dividends).
“But what’s interesting about those 20 worst days?” Housel adds. “Most happened at nearly the same time as the best 20 days — 1933, 1982, 2002, and 2008. It’s implausible to think anyone could have avoided the worst days and hit the best days without simply being lucky. It can literally mean in Monday, out Tuesday, back in Wednesday.”
Housel says it’s thus critical not to let volatility scare you out of the market. In fact, volatility is part of why stocks perform well over the long haul, he says. He quotes Wharton Professor Jeremy Siegel, who has said, “Volatility scares enough people out of the market to generate superior returns for those who stay in.”
Housel says there’s a time when valuations can get so stretched — as they did during the tech bubble — that it makes sense to avoid stocks. But he says not to let short-term events drive your decisions.