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October 2022

The Mistake of Market Timing

“Time in the market is more important than timing the market.”

Written by
W. Gregory Richardson, CFA

President, Principal, Portfolio Manager

The bear market of 2022 has sent us all a stark reminder that stocks can be volatile. And after a decade of growth, many investors were unprepared for the declines. As a result, some may be tempted to “time the market” by selling now with the intention to buy later. However, there is no evidence this strategy works—and significant evidence that trying to time the market is detrimental to long-term returns.

As shown in the attached graph, missing out on only the ten best days over a 30-year period would have resulted in returns one-third lower than if the investor had stayed patient and stayed put. Missing more than those top ten days would result in even worse performance.

Compounded over 30 years, this kind of mistake would have a huge detrimental impact on the growth of one’s portfolio. $10,000 compounded at 7.7% per year (the rate shown in our chart for the patient investor) grows to $92,828 over 30 years but only $42,485 when growth is reduced to 4.9% annually (the rate for the investor who misses the best 10 days).

Finally, perhaps counterintuitively, some of the best daily returns on Wall Street happen during bear markets, as stocks begin to stage a recovery on early expectations the economy may have hit bottom. Conversely, some of the worst days can occur during a bull market that is nearing its end, as sentiment turns negative. All of this means that timing the market correctly is extraordinarily hard.

The bottom line: funds that are appropriately invested for the long-term should stay in the market, despite the sometimes nerve-wracking volatility.