It’s not about market timing – but time in the market.
“Buy low, sell high” is the most basic – and also the least possible – stock market investment advice. Some people can get close to a stock’s, or market’s, highs and lows, some of the time. But doing it consistently over time is impossible.
Markets are volatile – they twist and turn like rollercoasters. And if your timing is off, and you miss the weeks where the market posts its strongest returns, you can do enormous harm to your overall returns.
Missing the best weeks
We looked at the weekly performance of the MSCI Asia ex Japan Index since January 1988. We then looked at how your portfolio performance would change if you missed some of the weeks where the market performed most strongly.
Since January 1988, the MSCI Asia ex Japan Index has had 1,489 trading weeks. Over that time period, it’s returned 400 percent (not including dividends), reflecting an average annual return of 5.8 percent, and an average weekly return of 0.11 percent.
The table below shows what would have happened if you had been invested during the entire 1,489-week period – except for the best-performing weeks.
If you missed just the single best week of market performance since 1988 (which was the week of February 6, 1998, when the Asia ex Japan index gained 13.6 percent), your accumulated returns over the past 28 years would have been 60 percent less than if you had stayed invested during that week.
(Note that if you had missed out on that great week, your portfolio would also have missed out on the effect of compounding. That’s why the total return at the end of the period would be so much less than just the 13.6 percent return you’d have missed out on.)
Similarly, an investor who missed just the best five trading weeks of the entire period (or, in other words, who was invested for 99.7 percent of the entire 1,489-week period) would have seen his average annual returns decline from 5.8 percent (for 100 percent of the period), to just 3.9 percent.
And if you were somehow the worst buy-low-sell-high investor in history, and missed the 20 best-performing weeks of trading (or 1.3 percent of the entire period), you would have earned an accumulated return of just 12 percent… since 1988. That’s just 0.4 percent a year. All of the positive performance of the Asia ex Japan index since 1988 is generated from just 22 weeks’ worth of performance (if you miss the 23 best weeks, the return drops to -4.1 percent).
(Note: These figures reflect actual index performance, excluding dividends. Investors can invest in the MSCI Asia ex Japan index using an ETF, like the iShares MSCI Asia ex Japan ETF (Hong Kong; code: 3010; NASDAQ; ticker: AAXJ) or the Lyxxor UCITS MSCI Asia ex Japan ETF (Singapore: code: G1K). ETF management fees and commissions would mean that returns for an investor would be slightly lower.)
Most investors are afraid of losing money from falling markets. But what this shows is that investors should be most afraid of losing money by missing out on the best weeks of market performance.
Miss the best weeks, miss returns
To put it in perspective, the figure below shows what these annual returns look like compared to the average returns earned on a one-year Singapore Treasury bill – one of the safest, lowest yielding investments available.
If you missed the 20 best weeks of Asia ex Japan index performance out of the past 28 years (or 1.3 percent of the past 1,489 weeks), you would have earned just a quarter of what 1-year T-bills returned over the same period.
But investors who stayed invested throughout the entire period, through good weeks and bad weeks, would have earned annual returns of 5.8 percent. This shows that the best way to make money in the stock market is to stay invested in the stock market. Trying to time the markets will only cost you money.
So don’t fear bad market days or weeks. What you should really be afraid of is missing out on the really good weeks.