Trying to navigate the peaks and valleys of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. But no one can predict when those will occur. Of course we’d all like to avoid declines. The anxiety that keeps investors on the sidelines may save them that pain, but it may ensure they’ll miss the gain. Historically, each downturn has been followed by an eventual upswing, although there is no guarantee that will always happen. Trying to avoid risk could itself be risky, since it’s impossible to know when to get back in.
The chart below shows two hypothetical investments in the S&P 500 over the 20-year period ending December 31, 2018. Each investor contributed $10,000 every year. One investor somehow managed to pick the very best day (the market low) of each year to invest. The average annual return on that investment would have been 9.16%. The other investor was not so lucky and actually picked the worst day (market high) each year. Even with the worst investment timing, the average annual return would have been 6.91%. At the end of 20 years, the cumulative investment of $200,000 had a value of $415,560.
So even selecting the worst day each year to invest, someone who continued investing in the market over the past 20 years would have come out ahead. It’s important to note that regular investing neither ensures a profit or protects against a loss. However, the tables below illustrate how regular investing can be beneficial.
Timing isn’t critical to long-term success:
Average annual total return (1/14/1999-12/31/2018): 9.16%
Average annual total return (12/31/1999-12/31/2018): 6.91%
Note that the hypothetical investors above didn’t pull out of the market, but stayed the course for 20 years. That perseverance helped improve the chances that they would come out ahead. In fact, history has shown that positive outcomes occur much more often over longer periods than shorter ones.
Over the past 91 years, the S&P 500 has gone up and down each year. In fact 27% of those years had negative results. As you can see in the chart below, one-year investments produced negative results more often than investments held for longer periods. If those short-term one-year investors had held on for just two more years, they would have experienced nearly half as many negative periods.
And the longer the time frame — through highs and lows — the greater the chances of a positive outcome. Indeed, over the past 91 years, through December 31, 2018, 94% of 10-year periods have been positive ones. Investors who have stayed in the market through occasional (and inevitable) periods of declining stock prices historically have been rewarded for their long-term outlook.
History has shown the longer the period, the greater the chances of a positive outcome:
The past decade has been unsettling for many investors. The recession of 2008–2009 made some investors so fearful, they stopped contributing to their accounts — or even withdrew their money at market lows, thus locking in the losses. They may have thought sitting out for a while seemed like a good strategy. But trying to avoid the worst drops means also missing the opportunity for gains (and frequently investors get out too late to avoid the worst of the decline). The chart below shows what would have happened to a hypothetical investment of $1,000 in the S&P 500 in the decade of 2009 through 2018 if an investor had missed the best days of that period.
If the $1,000 investment hadn’t been touched through the full period, it would have grown to $2,775 — with an average annual return of 10.75%. But missing 30 of the best days in that period would have put the investor in negative territory, losing 8.18% of the initial value.
The more missed best days, the steeper the loss:
Of course, investors could also leave the market and miss the worst days. However, studies show that people generally stop investing when the market is down, after an especially difficult downturn, and they return after the market has already begun to bounce back.
Rather than trying to predict highs and lows, it’s important to stay invested through a full market cycle. Focus on the time you stay invested, not the timing of your investments.
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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.
Regular investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.
Past results are not predictive of results in future periods.