by Ward Rice ([email protected])
Everybody is talking about the lessons learned from the last week of trading in October. The one thing I was reminded of is that October is THE most volatile month to be invested in the stock market. Why is that? Not being a gooroo, I don't have a clue.
From what I have read, though, the "mom-and pop" investors (i.e., you and me) were not responsible for all the volatility. Rather, it was coming from the "professional" investors who run big mutual funds. Seems the end of October marks the annual performance review on which their annual performance bonuses are based. To lock in gains, they have to sell stock when the market is headed in the wrong direction. Hence, all the volatility is due to these "Mr. Octobers" (apologies to Reggie Jackson).
So what if you decided you didn't like all this volatility and decided to get out of the market every October 1 (decidedly un-Foolish)? The problem is, some of the biggest gains in the market also happen in October. Witness the past week. What if in your efforts to time the market you happened to be out of the market on a few of the best days?
As part of my Time magazine this week was an advertising supplement entitled "'Big Gooroo's guide to Wise Investing." No kidding. Wise was capitalized and everything! So I thought I'd see what fallacies were being propagated and skimmed the material. Much to my surprise, a lot of Foolish material was actually included in this "Wise" guide. The gooroo actually recommended investing for the long term and pointed out the advantage of staying fully invested.
For example, in the 80s, the average annual return of the S&P 500 over all 2,258 trading days was 17.5 %. If you happened to miss the ten best days (out of 2,528), the yield plunged to 12.6 %. It fell to 6.5 % if you missed the thirty best days.
Let's say you invested $10,000 in the S&P 500 in 1980 and left it alone. At the end of the decade you would have $50,162. If you tried to time the market, however, and missed the ten best days, your total would fall to $32,763. And you would only have $18,771 by missing the thirty best days out of 2,528. So when next October rolls around, be prepared for some volatility and stay Foolish by staying invested for the long term!!