When the stock market sold -10.7 percent in the three days following Liberation Day, a handful of clients called and asked, ‘Hold the course, right?’ They knew what I would say, and they all held on, and I was relieved.
When President Trump paused his tariff plan the following week, the S&P 500 rose 9.5 percent. That wasn’t enough to offset the loss, but it went a long way. One of my colleagues offhandedly said, ‘That’s why you hang one—missing the good days is a big deal.’
His comments reminded me of the analysis that shows the market return if you miss the best day. The moral of the analysis was that you can’t time the market, and missing the best day hurts returns more than people realize.
I was always ambivalent about that analysis because I wanted to know what would happen if you missed the worst day. We all know that returns will be a lot better without the worst day, and I wanted to know by how much.
I’ve done this work before, but I updated it over the weekend and found that missing the best and worst days is profound.
The green bars in the chart below show the S&P 500 total return for the last 20 years (and the return so far this year). The orange dots show the return without the worst day, and the yellow dots show what happens without the best days.
Over the entire period, the S&P 500 earned a 9.5 percent annualized return, for a cumulative return of 517.6 percent.
If you miss the best day, the annualized return drops to 4.9 percent, which equals 161.2 percent cumulatively. That’s right: Missing the best day each year meant almost 70 percent less money at the end of the period.
Of course, if you timed perfectly to miss the worst day each year, your returns would be fabulous. Over this period, the annualized return would have been 14.3 percent, which equals 1,354 percent cumulatively.
Not surprisingly, missing the best and worst days matter differently over time. In 2017, for example, you would have earned 19.7 percent without the best day and 23.6 percent without the worst day.
2020 represents the other end of the spectrum. Without the best day, you’d have only made 4.2 percent, but without the worst day, you’d have earned 29.5 percent – a massive 25 percent spread between the best and worst days.
That’s the biggest spread, but the other double-digit spreads are all in years with unusually high volatility. When we’re most tempted to get in and out of markets, the risk of missing the best and worst days is also highest.
They say the trouble with timing is that you have to make two decisions: one to exit and another to reenter. The best days often follow the worst days – it’s rare that you get a big pop and then suffer a decline.
So, as hard as it is, keep holding throughout the volatility, focus on the long-term, and adjust around the edges with tax-loss harvesting (if applicable) and rebalancing.
