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Timing the Stock Market Can be Risky and Costly

Timing the Stock Market Can be Risky and Costly

June 22, 2020

Consider a long-term buy-and-hold strategy, writes Peter Watson

S&P 500 data over 50 years shows the enormous cost of timing the market and missing out on the best days of stock performance. Long-term stock investing can be less risky with a buy-and-hold strategy.

The trouble with timing the stock market, and selling to avoid an anticipated decline in value, is you might miss days that stock prices rise.

Consider the cost to an investor by missing some of the best days the stock market has to offer.

We will use the value of the S&P 500, an index of large companies in the United States, from January 1970 to March 2020.

For patient long-term investors that invested $1,000 in US stocks in 1970, over the next 50 years that investment would have grown to $121,000. As we know, many investors are not patient.

If you miss the best performing single day during that five decade the return drops to $108,000.

Miss the best five days, and your return shrinks to $77,000. Miss the best 15 days and your return shrinks to $43,000 and finally miss the best 25 days and your return is only $26,000.

Every investor has their own unique circumstances dictating their actions. Unless there are extenuating circumstances, we recommend that stocks be owned by those with a long-term perspective and in most cases is best done on a buy-and-hold basis.

Fear that leads to short-term market timing can be most prevalent during times of economic unrest. These times are more likely to have exaggerated stock market volatility both up and down.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.