Here's Why You Should Stay In The Stock Market


By Chuck Carlson, CFA
CEO, Horizon Publishing

The market's gyrations this year have caused many investors to consider getting out of the market. This is a mistake. History has shown that "all-or-nothing" market timing is a losing game over time. Here's why:

(Several of these examples are from Charles Schwab research and the Financial Philosopher web site - www.financialphilosopher.typepad.com):

- Between 80% and 90% of the returns realized on stocks occur in less than 10% of trading days. So, if you're out of the market when stocks resume their march upward, your long-term returns may suffer significantly.

- A study by SEI Investments reviewed all the bear markets since World War II. According to the study, reported in The Wall Street Journal, stocks rose an average of 32.5% in the 12 months following the bear-market bottom. Yet, if you missed the bottom by just a week, that return fell to 24.3%. Waiting three months after the market turned cut your gain to less than 15%.

- From 1990 to 2005 a $10,000 investment would have grown to $51,354 had you just sat tight from beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you'd be looking at a mere $15,730.

- Nobel laureate William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors. While longterm investors were sitting tight, the market timer was fretting over when was the best time to get in or out of the market and not necessarily earning greater rewards.

- Between 1986 and 2005, the S&P 500 compounded at an annual rate of return of 11.9% - even in the face of the market crash in 1987, two recessions, two wars, 9/11, the 2000's "tech-wreck," accounting scandals (i.e. Enron), and more. Due to market timing, the average investor's return during that time was only 3.9%.

- If an investor missed just 40 of the biggest up days in the market over the last 20 years (1987-2007), their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.

- The market research firm DALBAR went one step further and looked at the returns of mutual fund investors over the 20-year period, 1986-2006, and reported the average market timer return was - 2%. During this same time period, the S&P 500 Index returned 12%.

Bottom line: Time is much more important than timing when it comes to long-term market success. I know it seems tempting to "get out of the market now and get back in when things are better." The problem is that you never know when things are better until it is too late, and stocks have already skyrocketed.

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