Fidelity Select Fundranker

Fundranker Blog—Missing Out

Missing Out

The November/December issue of Fidelity Investor’s Monthly has a good article about the hazard of missing time in the stock market. An S&P 500 index investor who capitulates after big drops in the index and sells his position can easily miss some of the best days in the market. For example, if you sold on Black Monday, October 19, 1987, when the S&P 500 fell 20%, you would have missed out on the 15% rally over the next two days. If you sold on October 10, 2008, after the S&P 500 fell for eight consecutive days, you would have missed out on the S&P 500’s 12% gain the following day. More recently, if you sold on November 20, 2008, after the S&P 500 fell 17.4% over five days, you would have missed out on the 19.2% gain over the succeeding five days.

The Fidelity article also charted the performance of the S&P 500 from January 1, 1980, to October 31, 2008, nearly 28 years. A $10,000 investment in the S&P 500 would have grown to $202,730 with a buy and hold strategy. If the investor had missed just the best five days for the S&P 500, the portfolio’s ending value would be only $134,842, 33% less. Missing the 10 best days lowers the ending portfolio value to $104,648, a drop of 48%. Missing the 30 best days impacts the ending portfolio value even more, lowering it to $45,703, 77% less. Finally, missing the best 50 days leaves the investor with an ending portfolio worth only $22,969, 88% less.

Analyses like this one are popular during times of market downturns, but that doesn’t make them any less meaningful. It never hurts to emphasize the perils of trying to time the market, especially in times of great turmoil, when it is even more tempting to do so.

Posted 12/4/08 12:02pm ET in Market