You can loose 1/2 of your Investment Returns by Missing the 10 Best Days?

Use a Buy and Hold Investing Strategy for Retirement

By Mike Rowan, 09/10/2009

Best Investing Strategy for Retirement? Over the market downturn of the past year, many investors saw their portfolios fall drastically. To many investors, the old buy and hold approach for their portfolios didn’t seem to make sense. These investors tended to act emotionally, and many of them sold out at or near the stock market bottom as a result. We wanted to take a closer look at what used to be the popular investing strategy of buy and hold, and why this is traditionally the best returning method.

Stocks Tend to Move, and Move Quickly The main factor working against market timing is that stock gains often come in quick, intense bursts. Miss enough of them and you lose all of the long-term advantages of owning stocks.

Remember 2004? It was a good year for stocks, with the S&P 500 index returning 10.9%. However, the rise was hardly smooth. From January through October 25 of that year, the S&P 500 was actually slightly down. Three-quarters of 2004’s return came in the following 14 trading days! If you were waiting till you felt confident in the market, you would have missed out completely. The more you try to time the market, the greater your chances of missing the market’s biggest single-day gains.

The opportunity cost can be substantial if you miss the best days by staying on the sidelines. Over the last 10 years ending June 30, 2006, missing the best 10 days of the S&P 500 (that’s 10 out of 2,517 total trading days) would have reduced your annual return from 8.3% to 3.3%.

Buy and Hold Investing in Action On June 30, 1994, Bill invested $10,000 in a stock index fund based on the S&P 500 Stock Index. As noted in the chart below, by June 30, 2004, the $10,000 would have grown to $31,260, an average annual total return of 12.07%.

However, suppose Bill decided to get out of the market during volatile periods in those ten-years, and as a result he missed the market’s ten best single-day performances. If that were the case, his 12.07% return would have fallen to 6.89%. If Bill missed the market’s best 20 days, his return would have dropped to 2.98%. Adding in transaction costs would have reduced his return even further.



You can’t control the markets, but you can control how you react to them. Don’t let short-term volatility drive your long-term investment planning. Long-term investors can ignore short-term market action. Your best defense against a fluctuating market is a well-diversified portfolio and a disciplined program of periodic investments. As Peter Lynch said, The real key to making money in stocks is not to get scared out of them.

1. No one can predict what the market will do in the future. Therefore, it is best to buy and hold good quality stocks.

2. If you were out of the market and missed the 10 or 20 best trading days, then your average annual return would be much lower than if had been in the market and fully invested on those days under the buy and hold approach.

3. There are no market-timing strategies that work consistently or as well as buy-and-hold over a prolonged period of time

4. According to many pundits, they have never met a market timer who has beaten the long term performance of the buy and hold strategy.