The Best Trading Days
FINANCIAL TOOL
The Best Trading Days
It’s natural to face the question of whether or not to go defensive in the midst of extreme volatility in markets.
When we see the S&P 500 moving 4%, 5% or even 6% to the downside in a single day, that can be very uncomfortable.
The question of what should be done in this instance differs with regard to each investor, because we’re playing a game of statistics with the market. And statistics mean something different depending on the situation, goals and time horizon.
Statistics don’t tell us what will happen. They guide us to a course of action with the highest likelihood for success at goal achievement over our time horizon.
A 50%+ chance of a bear market is risky for someone who is a short-term investor, especially if stocks are involved in a portion of their portfolio (hopefully not all of it!). But it’s less risky for a long-term investor looking at 10+ years of no withdrawals, or less than 5% annual withdrawals, planned from their portfolio.
The risk for a short-term investor is higher in riding through a potential bear market.
The risk for a long-term investor is higher in missing out on potential upside if a bear market doesn’t develop.
Why?
Because statistically, the BEST TRADING DAYS usually happen right alongside the worst trading days.
According to The Motley Fool, “over the last 20 years, from January 1, 2004 to December 29, 2023, six of the seven best days occurred after the worst days and seven of the best 10 days fell within two weeks of the 10 worst days within that two-decade period.”
So during the short period of time when we see markets dropping multiple percentage points, we’re also likely to see days when markets rise multiple percentage points.
In periods of high volatility, we could easily see 10% downside OR 10% upside in a very short period of time.
If we miss that 10% upside, that’s too bad for a short-term investor, but it can be devastating for a long-term investor.
That’s because the long-term investor has to also calculate the opportunity cost of missed exponential returns over their time horizon.
Missing those best days can be an astronomical cost to long-term investors, as Fidelity illustrates clearly in this hypothetical example. For long-term investors, better to ride through a bear market than to miss upside in a bull market.
Bear markets historically are significantly shorter in duration and experience less overall price change than bull markets.
So what can we do instead of timing the market? Well, there are rare instances in which timing the market might make sense. But having a proper risk management strategy that is ongoing, and set up from the beginning, is the most impactful and crucial key to long-term success.
And it helps you sleep at night, no matter what may happen in the stock market from day to day.
