Today let us discuss the importance of staying invested in the market at all times.
Human psychology often causes us to be overly bullish or bearish depending on the overall market’s existing trend. As a result, when the prevailing sentiment is optimistic in nature, investors tend to plow in more money into the market and tend to pull out money, often as a fire-sale, when sentiment turns pessimistic.
Consistent with earlier communications, we believe that timing the market is extremely difficult for even the savviest of investors and almost next to impossible.
We believe that in the absence of a crystal ball, the best alternative to improve returns is to continue to stay invested in the markets at all times.
To support this hypothesis, we analyzed the impact of moving out funds off the market for a range of time periods. To illustrate, we used the S&P 500 data starting from 01-Jan-2000 to 31-Dec-2019.
Investing in the S&P 500 is often done through the SPDR S&P 500 ETF Trust (SPY). This exchange-traded fund (ETF) is one of the most preferred options to mimic exposure to the S&P 500 market index.
The below chart shows the performance of SPY starting from 2000 till the start of this year.
The SPY has seen multiple swings over the past 20 years and despite various bouts of volatility and downturns, has delivered good returns to investors. Notable events include the impact of dotcom bust during the 2000s and the financial collapse of 2008.
The below chart shows the daily returns of the SPY.
As observed, the daily returns of the SPY have varied a lot. There have been periods of calm where the swings in daily returns have been small and during times of market volatility, the swings have been extremely huge. Particularly huge swings were observed from 2008 to 2010 as the markets recovered from the financial crisis.
Now, let’s look at the performance on the overall returns to an investor who was off the market due to a reactionary response to the overall market trend.
As evident from the table above, an investor participating in the markets at all times would have realized a healthy annualized return of 6.24% (in dollars terms… i.e. without considering appreciation of the USD against INR!).
Contrast that with an investor who missed the ten best days of the market may have realized a measly return of 2.45%.
Investors who miss days would actually lose money!
So, say YES to investing in the market… Say NO to timing!
Stay Invested! Stay Safe!