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Investor psychology can be fickle. Consider this common scenario: The stock market hits a rough patch, and skittish investors bail and park their money on the sidelines, thinking it a “safer” way to ride out the storm.
However, the math suggests — quite convincingly — that this is usually the wrong strategy.
“Getting in and out of the market, it’s a loser’s game,” said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta.
Why? Pulling out during volatile periods may cause investors to miss the market’s biggest trading days — thereby sacrificing significant earnings.
Over the past 30 years, the S&P 500 stock index had an 8% average annual return, according to a recent Wells Fargo Investment Institute analysis. Investors who missed the market’s 10 best days over that period would have earned 5.26%, a much lower return, it found.
Further, missing the 30 best days would have reduced average gains to 1.83%. Returns would have been worse still — 0.44%, or nearly flat — for those who missed the market’s 40 best days, and -0.86% for investors who missed the 50 best days, according to Wells Fargo.
Those returns wouldn’t have kept pace with the cost of living: Inflation averaged 2.5% from Feb. 1, 1994 through Jan. 31, 2024, the time period in question.
Markets are quick and unpredictable
In short: Stocks saw most of their gains “over just a few trading days,” according to the Wells Fargo report.
“Missing a handful of the best days in the market over long time periods can drastically reduce the average annual return an investor could gain just by holding on to their equity investments during sell-offs,” it said.
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