The stock market got off to a strong start in the month of March, standing in stark contrast to the plunging markets that investors faced this time last year. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite were all sharply higher as investors celebrated progress toward more stimulus payments to hard-hit Americans.
Plenty of investors have been waiting on the sidelines lately, hoping that the huge run higher in stocks would give way to a pullback that would let them invest at slightly less lofty price levels. Yet as you can see from today’s big move higher, not being in the market comes with consequences. You can count on seeing some old statistics that get trotted out every time the bull market soars, but that shouldn’t make you think that you’ve missed your chance to invest.
The cost of missing great market days
A study last year from J.P. Morgan looked at how investors would’ve done between 2000 and 2019 if they’d invested in the S&P 500 but missed out on some of the biggest daily gains. The results were astounding:
- Miss just the 10 top days, and your annualized returns would’ve gone from 6% to just 2.4%.
- Miss the 20 best days, and you’d barely have broken even.
- If you’d missed the 60 best days, you would’ve lost more than 75% of your money.
The conclusion the study draws is that market timing is bad, and you can’t afford to miss out on any of the big days in the market if you want to be a long-term winner in the stock market.
If anything, 2020’s experience only confirms the importance of having some of those top-performing days under your belt. The eight biggest point gains for the S&P 500 all happened in 2020, and investing only on those days would’ve given you a gain of 65%. The index actually gained 16% in 2020, so doing the math, if you take out those days, you would’ve been left with a loss of nearly 30%.
The reality of bad market timing
Those illustrations, however, are never realistic. You’d have to have truly terrible timing in order to lose this much money, because extremely good days and extremely bad days tend to come in close proximity to each other. Unless you sell every plunge and buy every rally, your results won’t be as bad as those often-quoted statistics suggest.
Again, take 2020 as an example. All of those big winning days happened between March 2 and April 6. However, five of the seven worst downward point moves also happened in that timeframe. In fact, because the down days overwhelmed the up days, you actually would’ve done better if you’d sold out at the close on Feb. 28 and gotten back in at the open April 7. The S&P went from 2,954 to 2,664 in that span — a loss of almost 10%.
More recently, even after today’s gains, the S&P didn’t set a new record. Those who invested at the highs in mid-February are still underwater.
Stay in it for the long run
None of this is meant to say that market timing is a smart thing to do. It’s difficult at best, and most people have emotional responses that lead them to make costly mistakes with their timing.
But it does explain why you shouldn’t be afraid to invest now. Even after a big up day, you’ve also missed a big downward move from all-time highs. And most importantly, the sooner you get your money to work in stocks for the long haul, the sooner you’ll be on the path toward the financial security that the market has delivered for decades.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.