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By The Numbers: A Statistical Look at Market Timing Steven Rinn, CFP®

03/27/2020

Statistics tell us a lot about whether or not we should try to time the markets, in particular in periods of high volatility, like those we’re seeing in conjunction with the COVID-19 pandemic. Here are some interesting statistical takes:

  • Missing the best days – Analysts at Putnam Investments examined the period from 2000 through 2014 and asked what would happen if an investor were to be out of the market completely for its 10 best days. A $10,000 investment at the outset would be worth $22,118 if left untouched in an index fund through that period of two bull and two bear markets. But just missing the 10 best days—three-tenths of a percent of the period—would reduce that gain by half. Missing the 20 best days would cut the gain by two-thirds to $7,297.1
  • When were the “best” days? – As opposed to some random point in the middle of a raging bull market, they occurred mostly in the worst of times. Of the 10 best days, seven were in the thick of bear markets. Two were in the first few weeks of the bull market that began in 2009, a time when few people believed and no one knew for sure that the worst stock selloff in 70 years had ended.
  • Missing the 10 worst days – Invesco Calculated that the cumulative returns of the S&P 500 and its predecessor index from 1928 through 2014 would have grown $10,000 into $1.166 million. Missing the 10 worst days during that span, including the 1929 crash, 1987 Black Monday and multiple days around Lehman Brothers bankruptcy in 2008, would have been left the investment at $3.65 million at the end of 2014.
  • Missing the best day – On October 21, 2008, the S&P 500 rose over 9 percent, a 10 Standard Deviation event, meaning it should occur once every 355,120,000,000,000,000 days.
  • Black Monday – 1987’s “Black Monday” was a 21 Standard Deviation event.
  • Most damage done – Dalbar Inc., a leading business practices evaluator, calculated the individual months when investors did the most damage to their long-run returns based on mutual fund cash flows. Topping the list was October 2008 when the Dow had its largest single-day drop after investors learned that Congress didn’t pass the bailout bill. Congress pushed it through days later, but the stock market was still down by nearly 17 percent for the month. Dalbar calculated that individual mutual fund investors lost over 24 percent of their investment value that month, the kind of decline that would normally take a couple of years of errors to account for.

1 – Jakab, Spencer. “Timing Isn’t Everything.” Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favor, 2016

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