Does market timing work?
By ATB Financial 28 May 2019 2 min read
A popular chart created by JP Morgan looks at what realized annualized returns would have been like if the 10 best trading days in US stocks had been missed, as represented by the S&P 500. The underlying message of the chart is patience. That it is better to stay invested, even when investors see their account values drop and they become tempted to move to cash.
Missing the best days
From the start of 1980 to the end of 2018, the S&P 500 experienced an annualized return of 11.33%. However, this didn’t come without trials and tribulations, because throughout this time period there were a number of declines of 20% or more. Using the same data, what would performance have been like if we had missed the best trading days for US stocks?
Overall, not great. By missing just the top 10 best days, the annualized return dropped from 11.3% to 9.26%. By expanding the analysis to missing out on the top 50 best trading days, the annualized return was cut in half.
Missing the worst days
On the flip side of the JP Morgan chart, how would missing an increasing number of the worst days in the market affect an investor’s potential return? As you can see in the chart below, the investor would have done much better than being fully invested the whole time.
ATB Wealth consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., ATB Securities Inc., and ATB Insurance Advisors Inc. are individually licensed users of the registered trade name ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.
The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness, and ATB Wealth does not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. ATB Wealth does not undertake to provide updated information should a change occur. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of ATB Wealth. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment.