of course, a successful approach must be repeatable. And so, the challenge facing the market timer is not simply to move into or out of the market once or twice, but rather to do so again and again over the course of years and decades. And that ability to correctly anticipate when to buy and sell across different market environments, political regimes, and economic cycles, is very rare indeed.
If there were no cost to mistiming moves in and out, then perhaps the endeavor would make more sense. After all, a high-reward, low-risk strategy would be appealing. The problem, however, is that if your movements are anything less than perfect, market timing is one of the riskiest tactics you can employ.
That statement may sound odd. After all, isn't it risky to stay invested in an overpriced market that may eventually decline in value? Wouldn't prudently sitting on the sidelines make sense?
Well, for starters let's discuss two different types of investment risk. The first, and more commonly cited, is volatility. This is the figure you might see quoted in mutual fund reports or stock analysis websites. Commonly measured as standard deviation, volatility simply describes how bumpy an investment's path has been over time. And of course, the bumpier the ride, the more uncomfortable it is to hold on. This volatility is what many market timers attempt to mitigate by moving in or out of the market.
However, there is a second type of risk that I would argue is more dangerous than volatility. I'm referring to shortfall risk, which is simply the risk that your realized investment returns fall short of the returns you require to meet your financial goals.
This risk, in my opinion, is the far more important one. Think about it this way: if you go to Disney World, the route you take to get there and any delays you face along the way may very well impact the quality of your vacation. But wouldn't a far greater measure of how good or bad the vacation is simply be this: Did you ever actually get to Disney World?
Similarly, although you certainly want to minimize the bumps you face on your journey toward financial freedom, the far more important measure of success is whether you actually achieve that freedom. And that is why moving in and out of the market, with anything less than perfect timing, is so dangerous.
Consider two investors whom we'll call Jane and Tarzan. Both Jane and Tarzan started with $100,000. Both of them invested for 20 years. And most importantly, they both held exactly the same portfolio, allocated entirely to the S&P 500.
Jane put her $100,000 to work on day one and stayed invested through thick and thin for the entirety of her two-decade time horizon.
Tarzan did exactly the same thing, but with one important distinction. Tarzan sat out of the market for two months during that two-decade time frame.
Unfortunately for Tarzan, his timing was awful and those 60 days he missed out on turned out to be the best 60 days of the whole period. What kind of an impact do you think Tarzan's poor timing would have on his total investment returns, relative to Jane's total returns?
Jane stayed the course for the entire two decades and saw her $100,000 initial investment grow fourfold. On the other hand, Figure 2.5 shows that Tarzan missed the 60 best days during that period and saw his $100,000 drop by more than 70%! Keeping in mind that there were approximately 5,000 trading days during those 20 years, the difference between participating on 100% of those trading days versus participating in 99% of those trading days was $370,000!
Figure 2.5 Growth of $100,000 Invested in S&P 500 for 20 Years
SOURCE: Analysis by Brian Perry. Returns provided by JP Morgan Asset Management with data from Bloomberg; time frame 1998–2017.
What do you think? Would an extra $370,000 one way or the other have an impact on the quality of your retirement? Again, keep in mind that Jane and Tarzan had the same time horizon and invested in exactly the same thing. The only difference was that Jane stayed the course and Tarzan did not.
Does Crisis Equal Opportunity?
Let me ask you a question: When do you think the best trading days have occurred? Have they been during robust bull markets as stocks powered ahead? Did those magic days come following great economic news or reports of strong corporate profits?
No, they did not. In fact, most of the best days have followed sharp declines. Take a look at Figure 2.6.
That list shows the 11 best trading days in the history of the S&P 500, as measured by percentage gain. Six of those days came during the Great Depression. Two of them happened during the global financial crisis. Two more happened during the depths of the COVID-19 pandemic. And the only date that fell outside of some of the worst economic periods of the past century came immediately following Black Monday. As a reminder, Black Monday represented the most cataclysmic drop financial markets have experienced, with major market averages down more than 20%. The important takeaway is that every single one of the 11 best trading days occurred precisely when the average market timer was perhaps most likely to be sitting on the sidelines.
| Ranking | Date | % Gain |
| 1 | 3/15/1933 | 16.61% |
| 2 | 10/30/1929 | 12.53% |
| 3 | 10/6/1931 | 12.36% |
| 4 | 9/21/1932 | 11.81% |
| 5 | 10/13/2008 | 11.58% |
| 6 | 10/28/2008 | 10.79% |
| 7 | 9/5/1939 | 9.63% |
| 8 | 4/20/1933 | 9.52% |
| 9 | 3/24/2020 | 9.38% |
| 10 | 3/13/2020 | 9.29% |
| 11 | 10/21/1987 | 9.10% |
Figure 2.6 S&P 500 Largest Single-Day Percentage Gains
SOURCE: Analysis by Brian Perry. Data courtesy of S&P Dow Jones Indices LLC.
And that brings me to another point. I've heard many people (presumably non-Chinese speakers) say that the Chinese use the same written character for both crisis and opportunity and that, therefore,
