It would be wiser for investors to close their eyes rather than flee when the stock market becomes frightening.
The market’s reaction to the White House’s tariff announcements has been particularly erratic. Markets experienced sharp intraday fluctuations as investors attempted to understand the precise nature of economic policy, a sharp decline following President Donald Trump’s announcement of sweeping new tariffs on April 2, and a sharp increase following the announcement of a 90-day suspension on some of those taxes.
All of this turmoil highlighted a historical fact about the stock market: the biggest percentage gains and the steepest percentage declines frequently occur close together. Therefore, leaving the market after a significant decline could result in missing out on the finest days for the market.
When the S&P 500 SPX dropped almost 6% on April 4 and subsequently recovered 9.5% on April 9, investors had the opportunity to witness this firsthand.
This occurs more frequently than not. The S&P 500’s 30 greatest and 30 worst days during the last 30 years were charted by the Wells Fargo Investment Institute. It was discovered that the biggest percentage gains and losses frequently occurred shortly after one another.
Additionally, Wells Fargo demonstrated that the strongest stock market days happened during recessions or bear markets, when stocks were declining or rebounding from a decline.
History indicates that it can be challenging to distinguish between the greatest and worst days because they frequently happened in a short period of time, sometimes even on consecutive trading days. According to a note from Wells Fargo analysts, “these findings strongly argue for most investors to remain invested in equity markets, even during periods of high volatility.”
“Investing during these times of high volatility can be challenging, but that’s exactly what investors should be doing,” said Wealthfront’s head of investment strategy, Alex Michalka.
“It’s crucial to keep in mind that investors who hold cash on hand to protect themselves from market volatility or to wait for the ideal moment to invest run the danger of the market rising while they’re sitting on the sidelines. For instance, you would have missed the market’s best day since 2008 the week after if you had halted your investments on April 3 due to the market decline, Michalka told MarketWatch.
“Selling on April 3 would have been even worse,” he stated. “The markets might have another great day that would be missed while waiting out the terrible days, but they might also dip again soon. It is preferable to keep investing gradually over time in the absence of a market-behavior crystal ball in order to avoid missing the finest market days.
In the long run, missing the finest market days might be quite detrimental to an investor. LPL Financial’s chief technical strategist, Adam Turnquist, conducted an experiment in which he examined the S&P 500’s historical performance from 1990 until 2024. He pointed out that over this time, the index’s average annualized return was 9.8%. An investor’s investment would have increased by roughly 9.8% annually if they had invested in a cheap index-tracking exchange-traded fund at the beginning of 1990 and done nothing else.
That investor’s annualized return, however, would be roughly 6.1% if they somehow missed the market’s peak day during that 35-year period. That yearly return drops to 3% if you miss the two best days. That annualized return would be negative if the five best days were missed.
Naturally, this presupposes that an investor missed the largest gains despite going through all the worst dips since they sold before one of the best market days and then immediately purchased back in. It would take some incredibly awful timing for that to happen. It’s similarly challenging to time the market precisely so that you can invest during the best times and avoid the worst.
Perfectly timing the market might also not have much of an impact on long-term investors. Another hypothetical was examined by RBC Global Asset Management, which contrasted the returns of an investor who performed dollar-cost averaging over a 20-year period with an investor who was able to time the market precisely. Even though the investor who timed things perfectly did better, the difference was little and most likely not worth the risk.
Even when significant market declines cause some long-term investors to give up, it is probably best for them to avoid trying to time the market.
“‘Don’t panic’ is very cliché and easier said than done, but history does a good job of explaining why you should not panic,” Turnquist stated to BourseWatch.
