Why Staying Invested is Important For Success in Stock Investing

One of my favorite topics that I have written about in the past is the futility of trying to time the market. For most investors, the best strategy in equity investing is to simply hold stocks for the long-term. This is because nobody knows when markets will turn one way or the other. For example, the outcome of the recent US elections was totally unexpected and has led to a dramatic rise in stock prices. Hence investors that continue to stay invested have seen solid gains in recent weeks.Similarly investors who rode out the great recession of the 2008-09 have mostly recovered their losses and have even seen gains.

I came across an article at Vanguard Canada in which the author Chris Tidmore showed that the stock market’s best and worst days tend to happen close together. To put it another way, sharp declines are closely followed by strong rises and vice versa. Hence timing the market by selling at the top and buying back at the bottom is impossible to execute.

From the article:

As Charles Dickens more eloquently put it, countless positive and negative things in life are hard to separate. Many times we see this when we look at the equity markets over the short term. Markets can be extremely volatile on a daily basis (even intraday).

You’ve probably seen a chart illustrating the effect of being invested during the best days in the stock market while avoiding the worst days. What often isn’t discussed is the difficulty in trying to successfully time the market either to elude the worst days or capture the best days.

To help you explain the challenges of timing the market to clients, we looked at the 20 worst and 20 best days in the United States equity market from 1990 through 2015. What we found is that all but one of the worst days were within a month of at least one extreme “up” day.

The stock market’s best and worst days have tended to happen close together

Standard & Poor’s 500 Index daily returns, 1990–2015

Figure 1

Source: Vanguard.

It’s clear that the best of times and the worst of times—on a daily basis—haven’t been that far apart in the stock market. It’s also clear that the only way to guarantee never missing the best days is to stay invested.

Source: When the worst of times is the best of times, Vanguard Canada

The takeaway: Staying invested thru the worst of times and the best of times is the smart way to build wealth by investing in stocks.

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