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2020 and Market Timing Thumbnail

2020 and Market Timing

There is a natural impulse to want to sell stocks in favor of cash during times of market stress. However, acting on such an inclination can seriously hamper long-term investment returns.  

Prior to 2020, the previous 20 years provided an annualized 6.1% return in the S&P 500 through December 2019.  This time period included a 49% decline as the Tech Bubble (2000-2002) unwound and a 57% downturn due to the Financial Crisis (2008-2009) over a total of 5,284 trading days.  If just 10 of the best trading days over these two decades were missed, the return of the S&P 500 would have been reduced by more than half.  Missing the 20 best days distilled the return to nearly zero.  Missing the best 30 days or more resulted in negative returns.  The chart below provides the specific data:

Chart: S&P 500 returns and market timing

Despite these facts, money market balances (cash and cash equivalents) ballooned to all-time highs of $2.6 trillion in the spring of 2020 as equity prices sank.  This data suggests, at least in part, that millions of investors sold stocks in favor of cash at the most inopportune time.  

Case in point, if a hypothetical investor in the S&P 500 sold stocks to cash and managed to miss just the two best trading days of 2020, total return for the year would have been negative.  

Increasing the likelihood of such a scenario was the fact that 2020's best single day return of 9.4% was on March 24, the day after the index’s most recent low, and only six trading days after the worst day of the year, a decline of 12.0% on March 16th.  March 13th saw the index rise 9.3% and was the year’s second best single day return.  

It was during these precarious eight trading days when investors were most at risk of exiting stocks and potentially impairing their long-term investment success.  2020 reinforced the importance of staying invested and committed to a long-term investment strategy.  The case for trying to time the market in 2020 or anytime in the past or future remains unconvincing. 


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