“The real fortunes in this country have been made by people who have been right about the business they invested in, and not right about the timing of the stock market.” – Warren Buffett
It’s easy to stay invested when markets are up. It’s far more difficult when they are down. We believe investors are best served by ignoring the day-to-day, month-to-month, and even year-to-year fluctuations of the stock market and focus instead on the long term.
As tempting as it can be to imagine scenarios in which we are able to invest our money at the bottom and cash out at the top (also known as timing the market), the reality is that no one knows ahead of time when those tops and bottoms will occur. In order for a market timing strategy to be successful, an investor must correctly decide both when to buy and when to sell. Yet, this is difficult for even the most experienced investors and making the wrong call on market timing can negatively impact total returns.
Looking back at broad global index data since 1988, if an investor missed only the 10 best days of returns from the S&P 500 Index, their total annualized return would be more than 2.5% lower than an investor who remained in the market the whole time. When it comes to Canadian equities, missing the best 25 days would see an investor’s annualized return decline by more than two-thirds.
Source: Guardian Capital LP based on data sourced from Bloomberg as of March 31, 2022. Daily returns since January 1, 1988 annualized in CAD.
While the goal of any market timer is to miss the periods of lowest returns, not the highest, history shows that the latter most frequently occurs immediately after a period of significant losses. It is incredibly unlikely that any investor could time the market so well as to consistently avoid this period of negative return, then invest in the market again to capture one of these historical highest single-day returns.
In fact, using Canadian equities as an example, the average return over the 10 highest single-day returns was 7.5%, while the average return over the 60-trading day period that preceded each of those 10 days was -31.3%! The tables below show this holds across asset classes.
Source: Guardian Capital LP based on data sourced from Bloomberg as of March 31, 2022. Daily returns since January 1, 1988 in CAD.
While it would be nice to avoid market downturns completely, the fact is that they occur reasonably frequently in equity markets. In Canadian dollar terms, a drop of at least 5% occurs every 12-18 months, on average, for equity markets around the world, while a drop of at least 10% occurs every 2-4 years.
Source: Guardian Capital LP based on data sourced from Bloomberg as of March 31, 2022. Returns since January 1, 1988 annualized in CAD
In the midst of market volatility, it may be tempting to reduce or even eliminate your investments in equities. Market gyrations can be difficult to tolerate, but history shows that the longer an investment was held, the less variable the returns were. The chart below demonstrates the range of returns investors have experienced in each asset class over various time periods. The Canadian equity market has seen 1-year returns range anywhere from -38% to +63% since 1988, while over any 20-year period the annualized returns have been in a much tighter (and entirely positive) range of +4% to +10%, despite covering significant downturns and periods of heightened volatility.