Think you can time the markets? Five losing days made up most of the losses this year

Published Wed, Dec 28 20228:54 AM ESTUpdated Wed, Dec 28 202211:37 AM EST

In my book, " Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange ," I devote an entire chapter to the value of staying invested and avoiding trying to time the market. In theory, putting money into the market when prices are down, then selling when they are higher, then buying when they are low again, in an infinite loop, is the perfect way to own stocks. The problem is no one has consistently been able to identify market tops and bottoms, and the cost of not being in the market on the most important days is devastating to a long-term portfolio. There are many studies that indicate what happens to portfolios when they are not invested on days when the markets move up (or down) significantly. It does not matter who does the studies, they all come to the same conclusion: Don't bother with market timing. Here's an example from Dimensional Fund Advisors. Hypothetical growth of $1,000 invested in the S & P 500 in 1970 through August 2019 Total return $138,908 Minus the best-performing day $124,491 Minus the best 5 days $90,171 Minus the best 15 days $52,246 Minus the best 25 days $32,763 Source: Dimensional Fund Advisors These are amazing statistics. Missing just one day — "the best day" — in the last 50 years means you are making more than $14,000 less. That is 10% less money for not being in the market on one day. Miss the best five days, and you have 35% less money. Why is it so difficult to time the market? Because to time the market, you have to get two variables right — not one. You need to know when to buy, and when to sell. The need to get two variables right introduces much more complexity. It works the other way as well In a piece out Tuesday night, my friend from DataTrek Research, Nicholas Colas, pointed out that the folly of market timing works in the other direction as well. With the S & P 500 down nearly 20% for the year, he pointed out that just five days account for 98% of that loss. Sept. 13: Down 4.3% (hot CPI report) May 18: Down 4.0% ( Target missing Q1 earnings expectations) June 13: Down 3.9% (hot CPI report) April 29: Down 3.6% ( Amazon missed Q1 earnings expectations and reduced guidance) May 5: Down 3.6% (markets reversed one day after Federal Reserve Chair Jerome Powell assured investors the central bank was not considering future rate hikes of greater than 50 basis points ) Four additional days make up the difference between what would have been a flat year (excluding the days already discussed) and one where the S & P would be up 12.4%: Aug. 26 (down 3.4%), June 16 (down 3.3%), May 9 (down 3.2%) and March 7 (down 3.0%). Nick's takeaway? The same as my example above: "It is impossible to know ahead of time which days will 'make the year' in either up or down markets," he said. "History only tells us that, over time, there are more green days than red ones and that's enough to tip the scales in favor of owning equities." Amen. Correction: An earlier headline misstated the number of days.