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The Importance (and Cost) of Staying Invested at All Times
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The Importance (and Cost) of Staying Invested at All Times

'Market Timing' or 'Buy and Hold'

Aug 20, 2023
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The Importance (and Cost) of Staying Invested at All Times
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Investing is an activity that requires constant decision-making, and generally, investors are divided into two groups:

  • Those who try to predict market movements to buy and sell at the best time (market timing).

  • Those who choose to hold their investments for the long term (buy & hold).

In my opinion, for a small investor, the most efficient option is to always stay invested, and I will explain why below.

Firstly, getting the timing right to enter and exit the stock market is not an easy task, but rather impossible. Even the best investment fund managers are not able to achieve it sustainably for several years. According to the SPIVA report, around 90% of investment funds in the United States were unable to outperform the S&P Composite 1500 index over a period of 15 years.

Additionally, any unexpected event, such as an economic crisis or a pandemic, can derail the investor's initial intention. On the other hand, continuously buying and selling incurs an additional cost in commissions and taxes, which reduces the actual profitability.

Secondly, when doing market timing, there are times when one is not invested, which carries the risk of missing the best days of the market. An analysis by JP Morgan Asset Management shows significant differences in returns based on the market days missed. Missing the 30 best stock market days out of a total of 20 years makes the return almost 0%, even though one has been invested the rest of the time.

Investment Inforagrphic

And missing just 10 days reduces the return by half. The biggest stock market gains are usually concentrated in a few days, right in the middle of periods of instability and high volatility.

Lastly, long-term investment is the most profitable and efficient. Compound interest and risk reduction over time work in favor of the investor. According to a Bloomberg study, no investor would have lost money in the US stock market during periods of at least 15 years, even if they started investing at the highest point before any economic crisis.

In addition, minimum and maximum returns narrow as the investor remains invested. For example, if the MSCI ACWI index is used as a reference from 1989 to 2019, the return would fluctuate between -49.5% and +54.7% if invested for only one year, but would stabilize between 0.8% and 10.5% if held for 15 years without touching the investment.

As a seasoned finance professional, I would like to provide some honest insights on the world of investment. While a buy-and-hold strategy may seem like the go-to approach for many investors, the truth is that it is not always feasible in today's market. This is due to the fact that funds/ETFs are often created in response to major crises, with a primary focus on generating higher returns and, consequently, more revenue in fees.

As a result, witnessing days of significant growth in the S&P 500 may not always be as straightforward as it appears. Take the following ETFs, for example, which have some of the largest capitalizations:

Rank 
ı 
2 
3 
5 
SPDR 
Name 
SPDR 500 ETE Trust 
iShares Core 500 
iShares Core 500 
Vanguard 500 ETE 
Vanguard Total Stock Market ETF 
Invesco QQQ ETE 
Symbol 
voo 
QQQ 
Market Cap 
$378.7 B 
$309.44 B 
$290.92 B 
$283.32 B 
$126.92 B 
Price 
$412.63 
$414.3 
$378.97 
$204.69 
$322.89 
24h 
1.85% 
1.82% 
1.83% 
1.84% 
2.13% 
Price (30 days) 
-0.79% 
-0.80% 
-0.81% 
-0.78% 
0.10%
  • SPY: the only one that has truly delivered on its promise, created in 1993.

  • IVV: created in 2000, just after the dot-com bubble.

  • VOO: created in 2010, just after the 2008 crisis.

  • VTI: created in 2000, just after the dot-com bubble.

  • QQQ: created in 2000, just after the dot-com bubble.

As you can see, it can be quite challenging to achieve consistent returns over this period.

However, there are certain patterns that have been shown to outperform the index significantly. To achieve this, a well-defined system must be in place. For example, investing in factors with a growth or momentum strategy is much better than investing directly in the index.

MTD 
600— 
400— 
200— 
QTD 
YTD 
I YEAR 
2015 
3 YEAR 
5 YEAR 
2016 
10 YEAR 
2017 
EXPORT 
Wednesday, Apr 26, 2023 
COMPARE 
O 
SPICE 
S&P 500 Momentum Index (US Dollar) Gross Total Return: 326.18 
S&P 500 (TR): 
S&P 500 Growth (TR): 
S&P 500 Value (TR): 
2018 
2019 
2020 
2021 
2022 
307.58 
347.50 
255.22 
2023

This holds true on a global scale as well.

CUMULATIVE INDEX PERFORMANCE - GROSS RETURNS 
(APR 2008 - APR 2023) 
400 
— MSQ ACWI Growth 
— VISCI ACWI 
— MSCI world 
(USD) 
ANNUAL PERFORMANCE (%) 
Apr 13 
Jul 14 
Oct 15 
Jan 17 
Apr 18 
Oct 20 
296.80 
273.79 
250.00 
Apr 23 
Year 
2022 
2021 
2020 
2019 
2018 
2017 
2016 
2015 
2014 
2013 
2012 
2011 
2010 
2009 
MSCI ACWI 
Growth 
-28.44 
17.32 
33.93 
33.17 
-7.82 
30.46 
3.66 
1.91 
5.82 
23.62 
17.17 
-7.04 
15.49 
38.10 
MSCI ACWI MSCI World 
300 
200 
100 
Apr 08 
-17.96 
19.04 
16.82 
27.30 
-8.93 
24.62 
8.48 
-1.84 
4.71 
23.44 
16.80 
-6.86 
13.21 
35.41 
-17.73 
22.35 
16.50 
28.40 
-8.20 
23.07 
8.15 
-0.32 
5.50 
27.37 
16.54 
-5.02 
12.34 
30.79 
Jul 09 
Oct 10 
Jan 12 
Jul 19 
Jan 22

In conclusion, investing in the index may allow you to avoid many headaches, and even major market fluctuations. It won't matter if value or growth drops or if a particular bank goes bankrupt. You know that your index will never, and I repeat never, go bankrupt.

However, having entry and exit strategies or playing with leveraged ETFs can give you a clear advantage over always being invested. But this advantage can only be obtained if you acquire a well-defined system.

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