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This Is Precisely Why Timing the Market Isn't Worth Your While

By Sean Williams – Updated Mar 28, 2018 at 11:38AM

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This correlation between the stock market's best and worst single-day performances can't be overlooked.

Following two years without so much as a whisper of volatility, the iconic Dow Jones Industrial Average (^DJI) and broad-based S&P 500 (^GSPC -1.10%) are seemingly doing their best to keep investors on the edge of their seats. In February, the CBOE Volatility Index briefly hit a nine-year high following three grim single-day performances over a span of six days that saw the Dow lose 666 points, 1,033 points, and 1,175 points, its biggest single-day decline in history.

This volatility has continued into March, with the Dow Jones on Thursday, March 22, shedding 724 points. That's four the nine largest single-day point declines all occurring within a two-month span for an index spanning almost 122 years of history.

Using a red pen, a person plots troughs in a stock market chart.

Image source: Getty Images.

What's gotten into the stock market?

What's causing these swift declines in the major indexes? In part, some of the blame lies with concerns over a looming trade war. Recently announced tariffs on steel and aluminum are designed to directly hit China, which generates a substantial annual trade surplus from the United States. Wall Street and investors clearly fear the possibility of retaliatory tariffs, and thus slower global growth.

There have also been on-and-off concerns about rising interest rates. Though we're still well below the historic average for the federal funds target rate, the Federal Reserve is very clearly in a monetary tightening mode. As rates rise, lending becomes more expensive, putting a cap on corporate growth potential and exposing certain companies valued at high premiums.

Even scandals have taken their toll on the broader market. For example, Facebook's data collection practices are being probed by the Federal Trade Commission, which in turn comes after last week's debacle where it was reported that Cambridge Analytica used data from Facebook to more accurately target users during the 2016 election campaign. 

Trying to time the market isn't a smart idea

Altogether, these issues might look like the perfect reasons to pack things in, sell your stocks, and hide under the covers until everything blows over. However, that's often the worst thing you can do. History has proved time and again that trying to time the market simply isn't worth your while -- and the data proves it.

A table showing the Dow's top 20 single-day point increases and declines.

Data sources: Wikipedia, The Wall Street Journal. Table by author. Highlighted date column colors correlate to corresponding move up or down in opposite column within roughly two weeks' time.

In the table, you'll see a side-by-side of the Dow's 20 best and worst single-day performances based on total point moves. What you'll note by the correlated color coding in the date columns is that a majority of the Dow's best single-day point advances tend to occur within roughly two weeks of its worst single-day declines. 

This is consistent with a J.P. Morgan Asset Management report published in 2016, "Staying Invested During Volatile Markets," which found that around 60% of the biggest single-day percentage gains in the S&P 500 occurred within two weeks of one of its top-10 largest percentage declines between 1995 and 2014. This means even if you're lucky enough to hit the nail on the head once in a while, no one has the foresight to correctly predict every major pop and plunge in these major indexes with any consistency.

If you miss even a small handful of these major moves higher, you can kiss a good portion of your long-term return goodbye. According to J.P. Morgan Asset Management's report, for the 20-year period between Jan. 3, 1995 and Dec. 31, 2014 (including both the dot-com bubble and Great Recession) the S&P 500 returned 555% (9.9% annualized) for those investors who held on and never sold. If you missed just the 10 best days in terms of percentage gains over this more than 5,000-day period, your return was more than halved to 191%. 

A cheering woman in front of a rising chart.

Image source: Getty Images.

Should you need even more proof that you don't need to dive in and out of the stock market every time some new concern emerges, take a look at the historic performance of the S&P 500 since 1950. Despite undergoing 36 stock market corrections over that time -- i.e., at least a 10% loss from a recent high, when rounded -- all but one correction (the current one) has been completely erased by bull market rallies, according to data from Yardeni Research. Erasing stock market declines often happens within a matter of weeks or months, leaving those skeptics who ran to the sidelines eating the markets' dust more times than not.

Long story short, stop fretting.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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