What happened if you missed the best trading days over the last 2 decades?
I believe that trying to ‘time the market’ – buying and selling in anticipation of broad stock market moves – is suitable only for speculators and gamblers. In other words: I don’t recommend it, either for building or maintaining wealth. The odds that an investor can sell exactly at a peak, buy exactly at a trough, are impossibly low. Additionally, no one has ever done this. EVER. A person might get lucky once in a while, but no one has an effective strategy for anticipating market drops within even a month or two, let alone the exact day.
Individual investors have a tendency to pull money out of the markets during increased volatility, especially loss. (People tend to feel the sting of loss more than the enjoyment of gain.) While this may seem prudent (who wants to watch their net worth drop?), this is another form of trying to time the market.
The table below illustrates the negative effect on an investor from pulling money out of the market compared to staying in for the long haul. (Assumed initial investment of $10,000.)
(source: JP Morgan)
So what’s the takeaway? The longer you stay invested, the more likely you are of realizing gains. The more impulsive you are about moving money in and out of the market, the more likely you are to miss gains in both the short and long terms. There will be many market ups and downs during your life. Extending your holding period is one of the best defenses you have against that volatility.
NO ONE can correctly anticipate the highest peak before a crash or the lowest trough before a recovery. Don’t waste your time, effort or sanity trying to do it. Choose a strategy in which you believe, the time horizon that makes sense, and go for it.