Reasons Why a Smart Investor Remains Fully
Invested
by
Anh-Thu Ma
If you’re the type of investor that usually stands on the sidelines
to wait for just the right moment to intercept in the stock market
and also for just the right time to pull your investment out, then
there is something you should know.
As you’re standing on the sidelines waiting, some of the best
market’s best single-day performances could slip right past you. How certain are you of your timing
when it comes to deciding when is the best time to approach the market?
Could you be that confident in your timing strategy that you’re
willing to miss the possible gains or profit?
Missing even just a handful of them could cost you tremendously.
Your Return Could Be Cut in Half by Missing the Best 20 Days
Hypothetically, if you had invested $10,000 in the S&P 500 on
March 31, 1995, you would have made $32, 718 on an average annual
total return of 26.75% by March 31, 2000.
Suppose that in that five-year period frame, at times, you wanted
to pull out of the market and had missed the market’s 10 best single-day
performances. In that
case, your 26.75% return would have fallen to 17.42%. If you had missed the market’s 20
best days, that 26.75% return would have dropped to 11.46%. As we all should know by now, past
performance cannot guarantee comparable future results.
The Penalty for Missing the Market
Trying to time the market
can be an inexact-and-costly-exercise.
S&P 500 Index: March 31, 1995-March 31, 2000
Period of Investment
Average Annual Total
Return
Growth of $10,000
Fully Invested
26.75%
$32,718
Miss the 10 Best Days
17.42
$23,316
Miss the 20 Best Days
11.46
$17,201
Miss the 30 Best Days
6.48
$13,688
Miss the 40 Best Days
2.15
$11,123
Miss the 60 Best Days
-5.13
$7,687
Sources: Standard & Poor’s: Bloomberg
Calculations by AIM Distributors, Inc.
The S&P 500 is an unmanaged
group of securities widely regarded to be representative of large-company
stocks. Results assume
the reinvestment cannot be made directly in an index.
The Timing Game is Not a Good Strategy for Smart Investors
Basically,
the more you try to time the market, the greater your chances of missing
the market’s biggest single-day gains. This is the reason why it is not
the best idea to play the timing game. They don’t let the market’s short-term
gyrations sideline them or dictate their investment objectives.
They’re patient investors-focused on the long term and on the
long-term goals.
Anh-Thu Ma is the editor for the Finance & Investment
Section of Why Men Are and is is a MBA Graduate
with a Finance degree is also a GATOR Alumna. She is currently
with Cybervest Securities, Inc., a full
service brokerage firm where she holds the title as Director of Operations.
©Anh-Thu Ma. Why Men Are
