Investors who bail from stocks miss the comeback rallies. Here's what that means for your returns

Published Fri, Mar 11 202210:41 AM ESTUpdated Fri, Mar 11 202211:02 AM EST

A choppy market may tempt investors to panic sell stocks, but Bank of America warns that the cost of poorly timed trades could be enormous. After reviewing S & P 500 return data going back to the 1930s, the bank found if an investor sat out the 10 best days of every decade, he would have earned just 45%. By contrast, investors who held on during volatile swings would have found their gains soared by nearly 20,000%. The data highlights the perils of market timing for investors. As the best market days usually follow the worst ones, the key strategy for investors who want to see steady gains is patience, the firm found. "The best arbitrage opportunity for stocks is time," Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, wrote in a March 9 note. "The probability of losing money over one day is a little worse than a coin-flip (46%), but the probability declines to just 6% over a 10-year window since 1929," she said. It's a history lesson that could help investors today. This week, wild swings stemming from continued anxiety around inflation, as well as little progress in peace talks between Russia and Ukraine, have left investors bewildered, and uncertain what to make of the markets. For Bank of America, the latest rout in stocks represents an opportunity for uneasy investors to take a long-term mindset, and buy the dip. Valuations may not matter in the short term, but they're almost all that matter in the long term, analysts said. "The shift toward fast-money and quantitative strategies has left a market rife with long-term inefficiencies: long-term dispersion, or available alpha, sits at multidecade highs," Subramanian wrote. "And for US stocks, lengthening one's time horizon has been a recipe for loss avoidance." Though keeping a long-term perspective works well for stocks, it's not necessarily the same for other asset classes. For instance, while 10-year returns for the S & P 500 were negative just 6% of the time since 1929, the 10-year loss ratio is 30% for commodities, Bank of America found. For skittish investors, the firm noted high quality stocks are still trading at a "surprising discount" to low quality stocks, and could be used as a hedge against volatility. "History tells us that geopolitical dips should be bought, not sold," Subramanian wrote. — CNBC's Darla Mercado contributed to this report.

A trader looks at price monitors as he works on the floor at the New York Stock Exchange.

Brendan McDermid | Reuters

A choppy market may tempt investors to panic sell stocks, but Bank of America warns that the cost of poorly timed trades could be enormous.

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