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 from 1990 through 2015. What we found (see figure below) is that all but one of the worst days were within a month of at least one extreme up day.
It’s clear that the best of times and the worst of times—on a daily basis—aren’t 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.
Ever stop to think during which years those extreme days take place? We found that almost 50% of the worst trading days took place during a year with a positive return. In other words, some of the worst days occurred in otherwise good market years. Relatedly, we found about half of the best days occurred in negative-return years.
In fact, when we looked at the distribution of daily returns for various annual returns (see figure below), we saw that the years with larger down days also had larger up days for both sizable positive and sizable negative years. This substantiated previous Vanguard research showing that volatile episodic periods tended to cluster around significant and unpredictable global macro events.¹ What was also true was that once these “shocks” were alleviated, market volatility returned to more normalized levels.
Down days are going to happen; the key for all of us as investors is to stay the course, rather than make sudden changes based on macroeconomic events. As we witnessed recently with Brexit and the immediate (but quickly reversed) stock sell-off, we must instill in clients that the activities of short-term investors make the headlines but what clients should really be concerned about is long-term wealth creation.
As long as your clients’ asset allocations match their financial goals, risk tolerances, and time horizons, the best thing they can do is stay the course during seasons of light and seasons of darkness, times of hope and times of despair.²
I would like to express my sincere thanks to my colleagues Yan Zilbering and James Rowley for their contributions to this blog.
1 Francis M. Kinniry Jr., Todd Schlanger, and Christopher B. Philips, 2012. Recent stock market volatility: Extraordinary or ‘ordinary’? Valley Forge, Pa.: The Vanguard Group.
2 Charles Dickens, 1859. A tale of two cities. London, England: Chapman and Hall.
- All investing is subject to risk, including the possible loss of the money you invest.