By: Mike Earl
Many clients worry about stock market corrections. We have even seen clients move their 401(k) plan assets 100% into cash in one year, only to move it back to 100% stocks the next year.
The next time you are worrying about a 15% or 25% correction in the US stock market, try thinking about the other side of the coin. What if you miss out on the next 15% or 25% increase in the market?
The chart below illustrates just how devastating it would have been to miss the 10 best days in the S&P 500 index over the past 20 years. There are about 250 trading days per year, meaning this time period covered more than 5,000 trading days. To have missed the 10 best days would have meant being out of the market for 0.1% of the total trading days (one-tenth of one percent!). Yet missing those 10 days would have led to your personal rate of return being cut nearly in half.
Further, "six of the best 10 days occurred within two weeks of the 10 worst days." In other words, the big swings up and down often come in the same short time period, making market timing even more of a fool's errand.