Missing the market’s top-performing days can prove costly to a portfolio’s worth. Let’s consider an investor who missed only the 10 top-performing days during the 20-year period from 1993–2012. That’s 10 out of 5,040 trading days. That investor who was out of the market for those 10 days would have earned half as much as an investor who remained in the market for the entire period. They would have left 50% of their potential gains on the table by missing 10 days out of twenty years.
Constantly buying and selling not only has its own costs (commissions and transaction costs) but also risks missing out when an investment begins to move up again. The same thing is true on the downside, but over time, the market has consistently risen, so the opportunity cost on the upside exceeds the downside in the long run. Over time, the stock market tends to transfer money from greedy and fearful speculators to vigilant and rational investors.
Let’s consider an example. Let’s say Irving the Investor put $10,000 into his portfolio. If he held that investment for that same 20-year time period 1993–2002), it would have been worth $44,087. But another investor who missed the 10 top-performing days during that period would have only $22,050 to show for it—still a gain, but only half as much as Irving’s investment was worth, and less than he could have earned via a safer investment in T-Bills. When it comes to long-term wealth, being out of the market can be very expensive.
By accepting that nobody knows exactly how stock prices are going to behave, we can let go of some of the anxiety of speculation, and turn our focus to responsible investing.
This brings us to our second investment rule: Buy and Hold.