The Cost of Poorly Timing the Market

One of the most challenging aspects of long-term investing is that years of growth can be wiped out in days or weeks. While every stock market cycle is different, over the past 100 years, it generally has looked something like this -

Small incremental growth followed by a few small waves of panic resulting in declines of 5-10% each year, a few shocks of 20-30% every decade, and a complete meltdown every few decades. It can be tempting to try to avoid the big shocks or meltdowns because the reward for doing so is large. But what if you are wrong and what you think is a meltdown is only a shock, or what you think is a shock is only a small panic? What is the cost?

Over the past 20 years, if you missed the best 10 days, just one day every other year, your annualized return drops from 9.8% to 5.6%.

JPMorgan 2023 Guide to Retirement

$100,000 invested at 9.8% turns into $590,000 or just $280,000 at 5.6%. Consider that – your money is more than double that of an investor who missed just 10 days over a 20-year period.

While I admit it would take an extreme stroke of bad luck to miss all the best days, it’s worth noting that 6 out of the 7 best days over the past 20 years came the day after the worst days. So, if an investor is reacting in a moment of panic, and may change their mind later if proven wrong, the cost of making a change can be significant. It’s not missing just a few days or week – you could possibly be giving up a significant portion of your long-term growth.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.