As a followup to yesterday’s post on how to make money in the stock market, I thought I’d expand out the numbers and include the full dot com debacle rather than cutting off the analysis in 2001. Thus, I pulled the split-adjusted closing value of the S&P 5000 for every day from July 1, 1982 through June 29, 2007. This gives us a full 25 years of data ending at the close of the second quarter of this year.
In all, there were 6, 308 trading days during the period under consideration. Here are the pertinent numbers:
July 1, 1982 closing value: 108.71
June 29, 2007 closing value: 1503.35
Compounding that out, the S&P 500 grew at an average rate of 10.7% per year.
Once I had the data in hand, I simply figured the daily increase/decrease across the entire period, translated that into a daily percentage change, and then sorted the data. The positive point changes accounted for by the 10, 20, and 30 best performing days (in terms of percent change) are as follows:
Top 10 days: 366.68
Top 20 days: 737.25
Top 30 days: 1012.02
Now, turning this back into the sorts of numbers that we talked about previously… If you had invested $10, 000 on July 1, 1982 then, assuming that you were in the market for the full period, or that you missed the top 10, 20, or 20 days, you would’ve had the following amount as of June 29, 2007:
In for full period: $138, 289.95 (10.7%)
Missed top 10 days: $104, 541.44 (9.4%)
Missed top 20 days: $70, 471.90 (7.5%)
Missed top 30 days: $45, 196.39 (5.2%)
(The parenthetical values are the compound annual return for each scenario.)
As you can see, missing out on the biggest days has a huge impact on your investment performance. What makes this is all the more sinister is when the biggest days happened. Looking solely at the top 10 days in terms of percentage return, 3 of the 10 best days overall occurred in the 10 days following Black Monday in 1987, whereas 4 more occurred during the tumultuous bursting of the dot com bubble, including 2 right as the marketing was bottoming and starting to head back up.
In other words, if you lost your nerve in the wake of Black Monday, you would’ve missed out on a major rebound that included daily gains of 9.3%, 5.3%, and 4.9%. By the time you realized the world wasn’t about to end, you would’ve missed out on a big portion of the recovery. In other words, you would’ve truly sold low and then, once you got your nerve back, bought high.
Granted, if you were able to foresee Black Monday and get out just ahead of it, you would’ve missed the pain entirely. But be honest with yourself. How confident are you that you can consistently see events like that coming and get out at the peak? And how confident are you that you would’ve called the bottom and gotten back in the next day?
Of course, this analysis ignores the fact that you may have been prescient enough to get out early enough during certain declines to avoid a portion of the losses. Nonetheless, it does highlight the risks associated with missing a market rebound.
Note: The numbers from yesterday were pulled from an article in Money Magazine, and I thus can’t vouch for their accuracy. I also don’t know how if they judged the best days based on point gains or percentage gains. I used the latter, as it’s a more accurate metric of relative performance.