This one table shows you why you need to stay invested during falling markets

A man is deep in thought while looking at graph and rising and falling percentages.A man is deep in thought while looking at graph and rising and falling percentages.

Even though the S&P/ASX 200 Index (ASX: XJO) has rallied since the new year, the chances are your portfolio is still in the red.

With consumers and businesses suffering from nine consecutive months of interest rate rises, many experts are predicting more volatility for stocks in the near future.

The temptation, therefore, is definitely there to “sell the rally”. Protect some capital while the markets are up, then redeploy into ASX shares later when the skies are clearer.

It makes sense, but is it actually a good idea?

Timing the market vs buy-and-hold

Betashares executive Annabelle Dickson this week explored how wise such a strategy is.

First, let’s call “sell the rally” for what it is.

“This approach is referred to as ‘market timing’ and involves making investment decisions based on short-term market movements.”

According to Dickson, time and again buy-and-hold has proven to be more fruitful than trying to time the market.

“A buy-and-hold approach involves buying shares and holding them over the long-term, irrespective of market movements,” Dickson said on the Betashares blog.

“An overwhelming body of research finds that this passive buy-and-hold, long-term approach to owning shares produces better long-term results.”

What do the 20 best days on the ASX have in common?

Selling high then rebuying later might make sense in theory. But in reality it results in missing out on the biggest market rallies, which come immediately during and after a falling market.

“And the more of those big rallies that you miss out on, the lower your gains over the long term.”

To demonstrate this phenomenon, the Betashares team pulled out the 20 biggest one-day rallies on the ASX since 1 June 1992:

Amazingly, they have all come during or after a market crash.

20 biggest one-day rallies on the ASX since 1 June 1992

Date Rally (ASX 200 Accumulation Index) Context
30/3/2020 7.0% COVID-19 crash
29/10/1997 6.1% Asian financial crisis
17/3/2020 5.8% COVID-19 crash
25/11/2008 5.8% Global financial crisis
13/10/2008 5.6% Global financial crisis
25/3/2020 5.5% COVID-19 crash
3/11/2008 5.1% Global financial crisis
25/1/2008 5.0% Global financial crisis
20/8/2007 5.0% Global financial crisis
22/9/2008 4.6% Global financial crisis
13/3/2020 4.4% COVID-19 crash
23/1/2008 4.3% Global financial crisis
6/4/2020 4.3% COVID-19 crash
20/10/2008 4.3% Global financial crisis
28/11/2008 4.3% Global financial crisis
19/9/2008 4.3% Global financial crisis
1/10/2008 4.2% Global financial crisis
24/3/2020 4.2% COVID-19 crash
8/12/2008 4.1% Global financial crisis
30/10/2008 4.0% Global financial crisis
Source: Betashares

Dickson said that this showed that staying invested provides an investor exposure to all the ups and downs, “which over time may prove to be advantageous”.

“A recent paper from JP Morgan, Is market timing worth it during periods of intense volatility?, revealed that timing the market is almost impossible to achieve given that good and bad trading days fall so closely together.”

That study reported that over the last two decades, six of the seven best stock market days happened immediately after the worst day.

“In other words, it is very unlikely that an investor could be lucky enough to consistently miss the worst days while being invested in the market for the best days.”

Not doing anything is also killing you

Related behaviour is procrastination.

You refuse to buy ASX shares because the market outlook is terrible. You would rather buy in when you feel more comfortable that stock prices are rising.

But this is also a false idol. 

Dickson this time quoted a Schwarb Center study, which reported “even badly timed stock market investments were much better than having no share market investments at all”.

Again, it goes back to that table of the 20 best days on the ASX.

“Investors who procrastinate and do nothing are likely to miss out on the stock market’s potential growth,” said Dickson.

“Given the difficulty of timing the market, the most realistic strategy for the majority of investors would be to invest in stocks immediately.”

The post This one table shows you why you need to stay invested during falling markets appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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