To answer the question , “ Why is trying to time the market a bad idea ?” Vanguard recently looked at the performance of equities from June 1996 to March 2024 . Stocks during that period yielded a 9.7 % annualized return , or 1,218 % cumulatively .

While this included several historic bull-market runs , it also included five bear markets in which stocks dropped between 20 % and 55 %. A few of those bear markets were linked to other major events seared in investors ’ memories — the dot-com bubble , the Global Financial Crisis and the pandemic , the analysis noted .

“ Everyone would love to miss out on the worst days ,” says Chris Tidmore , senior manager at the Vanguard Group ’ s Investment Advisory Research Center , which did the analysis . “ But the really important thing is when you do that , you usually also miss out on the best days , because the two usually cluster together .”

Because volatility means ups and downs in the same time period , the Vanguard team then looked at the extremes of daily highs and lows and found that bull market volatility is less violent than bear market volatility .

In a bull market , the average daily return is 0.1 %, but the greatest single-day gain between 1996 and 2024 was 7.2 % while the greatest single-day loss was a drop of 7.0 %. But in a bear market , where the average daily return is negative 0.1 %, the greatest single-day gain was 11.4 % and the greatest single-day loss was negative 12.3 %.

“ Even when the market ’ s going down , you get more volatility , which includes really bad days and really good days ,” says Tidmore . “ Thinking of the fourth quarter of 2008 would be a great example . On average you ’ re ending up with more bad days than good days .”

On the other side of that , as the market turns around , there ’ s still volatility , but investors tend to have more good days than bad .

“ This would be turning the corner as we did in the first quarter of 2009 ,” he says . “ All you need are three good days combined with two bad days , and together [ you ] can end up with a good week if there ’ s a lot of movement .”

Investors who stay out of the market waiting for a bear market to reverse can easily miss out on those best days . So the Vanguard team illustrated what would happen to a $ 100,000 investment in a balanced 60 / 40 portfolio if the five best days were missed over that nearly 30-year time frame .

If that portfolio were fully invested and just left alone , the $ 100,000 would have grown to $ 865,000 . But if an investor tried to time the market and accidently missed out on just the five best days over those 28 years , the $ 100,000 would have grown to only $ 659,000 . Miss the best 10 days , and the investor would end up with just $ 540,000 .

“ What is the objective of investing ? The objective is to meet your goals ,” Tidmore says . “ You usually have put together a portfolio that is based on long-term expectations . If you ’ re trying to time the market , you ’ re adding additional risk that you ’ re not going to meet the returns you require to meet those goals .”

Vanguard ’ s research center also looked at the probability of positive returns versus negative returns based on what just happened with the markets .

As of early May , the U . S . stock market has been on a tear this year — the S & P 500 had hit 19 new highs in the first quarter , finishing the period with a gain of 10.2 %. This may lead some investors to think a correction or bear market is right around the corner , Tidmore says . But even if they ’ re right , the data suggests they ’ re wrong to flee the market .

In a bear market , where the average daily return is negative 0.1 %, the greatest single-day gain was 11.4 % and the greatest single-day loss was negative 12.3 %.

It did not matter whether the last quarter , last two quarters or last year was positive or negative . Why ? Between 60 % and 80 % of the time , the next quarter , two quarters or year had positive returns , according to the data .

Rebalancing portfolios is actually a far more logical way to turn volatility to clients ’ advantage . “ If the market goes up , you need to rebalance the portfolio . Same if the market goes down ,” Tidmore says . “ But this idea of getting out of the market is just not constructive .”

— Jennifer Lea Reed

JUNE 2024 | FINANCIAL ADVISOR MAGAZINE | 11