How 3 Days Can Change Your Life and Help You Retire Richer

Source: Images Money.

My Foolish colleague Morgan Housel recently wrote a great article, "99% of Long-Term Investing Is Doing Nothing; the Other 1% Will Change Your Life," that extolled the virtues of buy-and-hold investing and constant reinvestment no matter what market conditions may indicate.

It provided a great example of the reality that attempting to time the market can be truly disastrous for your portfolio.

Morgan showed that an individual who invested just $1 a month in the S&P 500 (^GSPC 1.14%) every month since 1900 would end up with more than $270,000 after 113 years, but an individual who simply stopped buying stocks during recessions would only have $160,000. 

Simply put, your total value would be nearly 70% higher if you patiently invested through recessions instead of pulling out your money and waiting on the sidelines.

I couldn't agree more with Morgan, and to reaffirm the power of buy-and-hold with additional evidence, I want to show you the dramatic difference just three days can make over a 63-year investment.

The three days
Consider an individual who invested $100 in the S&P -- the best choice for many -- at the beginning of 1950. If that person didn't touch that $100 for the following 63 years, the original investment would now be worth a little more than $11,000, as shown in the chart below:

The market has unquestionably been on a wild ride since 2000, but you can see how the virtue of patience can yield incredible benefits. And this 10 times return assumes just one investment of $100, and not constant monthly reinvestment.

But what if you had missed out on just the three best days during that 16,099-day sample size? Those would be the following:

If you didn't have your money in during that time, your total return plummets to $8,159. Put differently, missing just 0.02% of the days means your total return on that original $100 is worth $2,800 less. Compare the results as follows:

I know what you may be thinking -- why would I miss those three days, Patrick?

Two terrible weeks followed by one great day
Well, consider that in the 10 days prior to the example day of Oct. 21, 1987, the market had fallen by 26%. And that even includes a day in which it rose by 5.3%!

I don't suspect many pundits were urging investors to pour their money into the markets during one of the worst 10-day stretches in Wall Street history. Instead, many were likely doing just the opposite.

What about Oct. 13, 2008? In the 10 days before that, the market had also fallen 26%. And like the previous example, that includes a day in which it gained 5.4%. How about the final example, just two weeks later on Oct. 28? In the 10 days prior to that, the market fell 15.4%, and that 10-day stretch included days when the market rose by 4.3% and 4.8%

In all of this, we can see the perils of attempting to time the market. "Mistiming" an investment can have disastrous consequences, because the odds of an individual taking money out at the right time and then putting it back into the market at the right time are incredibly slim. 

While this is easy to say now as the market hits new highs, the reality remains that in times of crisis, unending and unyielding headlines about markets hitting staggering lows or prices plummeting should not dictate investment decisions. For almost all investors, attempting to time the market can have a devastating impact on total returns over a lifetime.

It has been said before, and I will say it again: buy-and-hold always wins.