In a separate article, “90 Days Attribute to 95% of Profits“, I warned that by missing the profitable periods of the stock market can cost you dearly in terms of gains.
I came across the following calculation from Kenneth Fisher:
If you are in S&P 500 for the entire period from 1 Jan 1982 to 31 Dec 2005 you will enjoy an average annual return of 10.6%. Pretty decent.
Here’s where it becomes scary, if you miss
10 of the 6261 trading days, your average annual return drops to 8.1%
20 of the 6261 trading days, your average annual return drops to 6.2%
30 of the 6261 trading days, your average annual return drops to 4.6%
40 of the 6261 trading days, your average annual return drops to 3.1%
50 of the 6261 trading days, your average annual return drops to 1.8%
Hence, if you try to time the market and you are wrong, your returns will be affected greatly.
Sometimes, it just scares you as a trader. Because you trade in and out frequently, your chance of missing out the best times increases. But a trader does have an advantage, to be able to gain additional profits by shorting a down trending market. It is very difficult to compare whether a trader would profit more or lesser than a buy-and-hold investor as each trader participate in the market differently. I believe there are traders who can outperform these figures but for majority of the people, staying in the market for a long period of time is a more sensible thing to do.
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- Warren Buffett – "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
- Trading Profits in relations to Time and Accuracy
- Warren Buffett – "The market, like the Lord, helps those who help themselves…"
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