Why the stock market bailout is likely to be a ‘loser’s game,’ says CFP

Investor psychology can be fickle. Consider this common scenario: The stock market is going through a rough patch, and skittish investors bail out and leave their money on the sidelines, thinking it’s a “safer” way to weather the storm.

However, the mathematics suggests—quite convincingly—that this is usually the wrong strategy.

“Getting in and out of the market is a loser’s game,” said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta.

Why? Exiting a trade during periods of volatility can cause investors to miss the market’s biggest trading days, thereby sacrificing significant profits.

Over the past 30 years, S&P 500 Index According to a recent analysis by the investment institute Wells Fargo, the average annual return of the stock index was 8%. Investors who missed the market’s 10 best days during that period would have earned 5.26%, much lower, it found.

Additionally, missing the 30 best days would reduce the average return to 1.83%. Returns would have been even worse—0.44%, or nearly flat—for those who missed the market’s 40 best days, and -0.86% for investors who missed the market’s 50 best days, according to Wells Fargo.

These earnings would not keep up with the cost of living: inflation averaged 2.5% from February 1, 1994 to January 31, 2024, the time period in question.

In short: The stock saw most of its gains in “just a few trading days,” according to a Wells Fargo report.

“Missing a few of the market’s best days over an extended period of time can dramatically reduce the average annual return an investor could earn by simply holding their stock investment during a sell-off,” it said.

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Unfortunately for investors, it is nearly impossible to time the market, investing on winning days and bailing out before losing days.

Markets can react unpredictably—and quickly—to unknown factors, such as the strength or weakness of the monthly jobs report or inflation data, or the outbreak of geopolitical conflict or war.

“Not only are markets unpredictable, but when these moves happen, they happen very quickly,” said Baker, a member of the CNBC Advisory Council.

Part of what makes this so difficult: The best days for the S&P 500 tend to “cluster” during recessions and bear markets, when markets are “most volatile,” according to Wells Fargo. And some of the worst days have come during bull markets, periods when the stock market is on a winning streak.

For example, the top 10 trading days by percentage gain over the past three decades all occurred during recessions, Wells Fargo found. (Six also coincided with a bear market.)

Some of the worst and best days followed each other: Three of the 30 best days and five of the 30 worst days occurred in the eight trading days from March 9 to March 18, 2020, according to Wells Fargo.

“As history has shown, isolating the best and worst days can be quite difficult because they often occurred within very tight timeframes, sometimes even on consecutive trading days,” the report said.

According to experts, mathematical calculations strongly suggest that people continue to invest in conditions of high volatility.

For further evidence, look no further than investors’ actual returns compared to the S&P 500 Index.

According to a DALBAR analysis cited by Wells Fargo, the average stock fund investor earned a 6.81% return over the three decades from 1993 to 2022, about three percentage points less than the S&P 500’s average return of 9.65 over that period. %.

This suggests that investors often make mistakes and, as a result, their profits fall.

“Frankly, the best advice is to strategically allocate assets across multiple asset classes and effectively stay the course,” Baker said.