In a year like this, when everything seems to be going south, it’s tempting to want to get out of the market completely. Then, when things get better, you’ll just get back in. But in practice, this is much harder than most people realize. In fact, it’s virtually impossible to get right because even in the midst of a longer-term pull-back there will be many short-term gyrations up and down.
It’s only in hindsight that we’ll know which of those gyrations eventually leads the market back up over the long-term. By then it’s too late and you’ve missed most of the recovery (which can happen in the blink of an eye). You will wind up getting whip-sawed all over the place when you would’ve been much better off just staying put.
The impact of being out of the market for just a short period of time can be profound, as shown by the below hypothetical investment in the stocks that make up the Russell 3000 Index, a broad US stock market benchmark.
A hypothetical $1,000 investment made in 1997 turns into $10,367 for the 25-year period ending December 31, 2021. Over that same period, if you miss the Russell 3000’s best week, which ended November 28, 2008, the value shrinks to $8,652. Miss the three best months, which ended June 22, 2020, and the total return dwindles to $7,308.
There’s no proven way to time the market—targeting the best days or moving to the sidelines to avoid the worst—so the evidence suggests staying put through good times and bad. Missing only a brief period of strong returns can drastically impact overall performance. We believe that investing for the long-term helps ensure that you’re in position to capture what the market has to offer.
Source: Dimensional Fund Advisors