Almost all big stock market gains and drops are concentrated in just a few trading days each year. Missing only a few days can have a dramatic impact on returns. Many market timers want to miss the worst-performing days, but, an even bigger issue is missing the best days, which usually occur soon after the worst days. The predicament, however, is that the worst days are equally concentrated and just as difficult to identify in advance as the best days. If someone could have avoided the worst days, and even better, only capture the best days, they would have obtained true guru status, which up to now, has not been granted to anyone.
University of Michigan Professor H. Nejat Seyhun analyzed 7,802 trading days for the 31 years from 1963 to 1993 and concluded that just 90 days generated 95% of all the years’ market gains — an average of just three days per year. The expected return of markets are positive and essentially constant. Therefore, investors who are out of the market for any period of time can expect to lose money. The S&P 500, on average, is positive only 53% of the trading days each year, (thus negative 47% of the trading days each year). However, stretch that out over a long period of time and you find the S&P 500 positive 72% of the years. Goes back to the famous market quote, it’s time in the market that’s important, not timing the market.