Don't Let Fear Cause You to Miss the Best Days in the Stock Market

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The latest inflation data only added to the potentially nerve-wracking headlines investors have been seeing. The March consumer price index (CPI) rose 8.5% on a year-over-year basis. Gasoline prices accounted for half of the increase. Core CPI, which excludes food and energy, jumped by 6.5% on a year-over-year basis. 

As investors, we don’t get choose the type of markets that exist over our life-spans. This year, so far, is certainly not shaping up to be one many of us would voluntarily choose. The major stock indexes remain in a correction (a bear market for the Nasdaq composite). The number of days with the S&P 500 index closing up or down by more than 1% is on track to exceed the 10-year annual average. Bond yields have been on the rise. The yield curve has flattened (but not signaled a forthcoming recession). The Federal Reserve is tightening monetary policy with a possibility of 50-basis-point (0.50%) increase occurring at one or more of the upcoming meetings. (The CME FedWatch tool currently assigns a 91% chance of a half-point rate hike occurring at next month’s meeting.) In the background of all this is Russia’s continued invasion of Ukraine and the sanctions resulting from it.

If any or all of this has you concerned about further downside volatility in stock prices, take a deep breath, grab some Tums and realize there could be big rewards for staying the course. History has shown the best days to be in the market tend to occur very close to the worst days. More importantly, if you miss those best days because you were out of the market on concern about what might happen, you will forfeit a large amount of wealth.

Our new Stock Superstars Report (SSR) editor Matt Markowski recently wrote about this using data Wayne Thorp compiled. Thorp isolated the “significant” up and down days in the S&P 500—those days where the S&P 500 increased or declined by 3% or more. Between January 3, 1928, and March 9, 2022, there were 294 days with an increase of 3% or more in the S&P 500 and 354 days with a decline of 3% or more out of more than 23,000 total days.

The chart below plots those significant daily moves. The horizontal axis shows the progression of time from left to right, while the vertical axis shows the magnitude of the daily price change for the index. As you can see, significant moves in the market—both to the upside and downside, tend to group together.

As Matt explained in the April SSR monthly report, “while there are the occasional articles on the benefits of missing the market’s worst days, the chart shows that to do so would mean missing out on many of the market’s best days. This is especially true since many of the biggest up days in the S&P 500 came during significant and prolonged market declines, when many investors were convinced that things were going to keep getting worse.

“If you stayed invested in the S&P 500 from the start of 1928 through March 9, 2022, you would have earned 23,987.2%. If you were out of the market for the 10 worst days over that period, you would have seen your return increase to 26,525.8%. Perhaps most surprising, though, was the impact of missing out on the 10 best days. Sitting on the sidelines for 0.04% of the days over this period would have dropped your return to 7,864.5%.”

It can be tempting to say, with the benefit of hindsight, that you simply need to miss the worst days. To miss the worst days but take advantage of the best days requires a perfect—not just a near-perfect, but a perfect—ability to the time the market because of the clustering of the best and worst days. Bluntly put, get your timing wrong and you may never recoup the wealth you’ve forfeited. This is among the reasons why we at AAII encourage investors to stay invested over the long term instead of attempting to time the market.

At the same time, ensure your allocation is the right one for you, and that your portfolio still reflects your desired allocation. Funds needed within the next few years should be invested in so-called safe assets such as savings accounts, money market funds, Treasury bills, etc. The goal is to preserve wealth. Funds not needed for at least 10 years should be aggressively invested to offset the deteriorating effects of inflation. In between, a mix of asset classes can help you find the right balance of realizing growth while keeping the volatility in your portfolio’s returns at a reasonable level.

Clustering of Days When the S&P 500 Has Moved Up or Down by at Least 3%