The investor who tries to “market timing”, i.e. to anticipate the best time to invest or divest, runs a very high risk of missing the biggest market rises. It's very simple: over the past 20 years, anyone who missed the 20 best days on the stock market would have lost ¾ of its potential return !
Missing a good day on the stock market has a lasting impact on the investor, since these "missed" gains will not be reinvested and will not yield a return thereafter. This explains why the gap widens over time, as in the graph above. Over the period we studied, the annualized return is thus 8% for those who have remained invested throughout the period and only 3,3% for those who have missed the 20 best days.
The best days follow the worst and tend to come in a short window of time during times of extreme volatility. Over the period we studied, 65% of the best sessions occurred 10 days or less from the worst sessions. While investors think that a bearish session announces others, it is often the opposite which occurs, making the “market timing” even more complicated.
Not only does missing the best trading days risk having a strong impact on the performance of your portfolio in the long term, but in addition, going back and forth on the markets is costly. Entry fees on certain funds, transaction fees charged by trading platforms, tax on stock market transactions levied by the State… All of this has a strong impact on the return of the active investor.
Volatility is what worries investors or would-be investors the most. But it is by definition impossible to predict... So the question should not be "when to invest"? "But "for how long?". Once this horizon is set, short-term volatility should no longer be a cause for trouble.
Once you’ve decided to invest, no more hassle. The only way not to miss the best trading days is to stay invested no matter what. And the best way to reduce the risk of volatility is to continue to invest regularly (what is called “dollar-cost averaging”). Because remember: no one beats the market in the long term, not even Warren Buffet…