Last week I touched on the idea of investors missing the best gains because they wait for safety before returning to the markets.
The concept of timing is fantastic in theory, moving in and out of the markets in anticipation of potential good times or potential danger ahead.
Of course, being able to do this relies almost on fortune telling like abilities.
Even the majority of so called professionals – active fund managers – fail to beat the market in the first place.
So the question is – why do investors miss the best gains?
Basically, when share markets move, they move fast.
So missing a few days of high returns can make a substantial difference to long-term performance.
If you had invested $1000 into the S&P ASX 300 Accumulation index in 1992 and left it there until the end of December 2010, it would have grown to a balance of $7883
A healthy compound return of 11.8%, however if you’d missed the best day during that period, your balance would have slipped to $7374.
Take it a step further and remove the best five market days from that 17.5 year period and your balance would further slip to $5814.
Remove the best 25 days and that balance falls to less than a third of the balance had the investor remained in the market for the whole period, down to $2344.
The annualised compound return without those best 25 days falls to 4.7% – lower than the annualised compound return of the cash rate of 5.7% for the same period, which would have produced a return of $2824.
It seems absurd that missing less than a month of trading days in 17 years can potentially mean a 70% lower return, but that’s the reality.
And unless you’re a fortune teller, how do you know when those best days will come?
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s best financial planner.
