Dividend Investing Ideas Center
Have you ever wished for the safety of bonds, but the return potential...
Rising volatility and choppy trading have been two dominant themes thus far in 2015, rewarding nimble traders and punishing those investors who are incapable of sticking to their plan. All this back-and-forth trading, induced largely by uncertainty in the eurozone, has prompted us to reconsider just how valuable the most volatile tradings sessions are from a long-term perspective. After all, one would expect that “big up” days would have a net positive effect on the broad market’s trajectory over time.
As it turns out, that couldn’t be further from the truth; that is to say, the most prosperous days on Wall Street have had little to no impact on the broad equity market’s ascent over the years. You might be wondering how that’s possible; we’ll let the data speak for itself.
Eddy Elfenbein, one of the most respected buy-and-hold bloggers around, recently posted some noteworthy findings regarding the impact of the most volatile up and down days on Wall Street. His findings, dating all the way back to the 1930s, concluded that:
“The S&P 500 rose by more than 1.17% over 1,900 times (about 9.2% of the time), and it fell by more than 1.17% over 1,800 times (about 8.7% of the time). While the down days are fewer in number, they tend to be more severe. If we combine all the days with moves greater than 1.17%, it nets out almost perfectly to zero.”
In other words, if you were invested during only the best and worst trading sessions, your return would be close to zero; when you factor in inflation, you’re surely looking at a negative return over a long enough time horizon. The reason behind this phenomenon is more straightforward than you might expect: plain and simple, the “big up” days tend to be concentrated around the “big down” days. In other words, the most volatile trading sessions more or less cancel each other out.
So how is it possible that the long-term trajectory of the stock market is undeniably upward-sloping? Well, it’s because the gains seen during the “boring” days add up over time. As Eddy Elfenbein puts it — the stock market likes it boring.
We conducted a similar study as the one profiled above, and not surprisingly, we also came to the conclusion that investors are better off buying and holding rather than attempting to time the market; be sure to read Market Timing vs. Buy and Hold: Which is Better?
The ultimate takeaway here is that If you try to navigate all of the ups and downs on Wall Street, you’re more than likely going to end up missing out on some of the best trading days in your attempt to avoid some of the worst trading sessions. Focus on formulating an investment plan and sticking to it, because for most investors, there’s little to no value in trying to time the market.
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