As long-term investors, one thing we have learned is that financial markets tend to be “forward-looking.” Changes in valuations tend to occur ahead of expected events as traders and speculators digest and act upon news that emerges. When we are experiencing major uncertainties, the markets tend to look forward, and some of the best trading days happen before there is more clarity in the future.
In our March 2022 email, we examined the effect of missing historical top trading days on the valuation of a hypothetical portfolio invested with returns of the S&P 500. If you recall, our data suggested the ending portfolio could have been over 30% lower during the investing period of 12/31/1971 – 12/31/2021 if the portfolio was in cash during the 5 top trading days.
Interestingly, when we pull the top trading days, we find that many of them occurred during uncertain environments (source: Yahoo Finance):
Trading Day S&P Return Environment
October 13, 2008 11.6% Financial Crisis 2007-2009
October 28, 2008 10.8% Financial Crisis 2007-2009
March 24, 2020 9.4% COVID-19
March 13, 2020 9.3% COVID-19
October 21, 1987 9.1% Black Monday 1987
As can be seen, the top five days of gains in the S&P 500 occurred when there was a lot of worry in the markets. They also occurred after the S&P 500 had already experienced weakness and the end of the then-current uncertainties had not yet been resolved.
Of course, we don’t know how this current market will play out. However, because these best days tend to occur during the bleakest of times, we continue to believe the best course of action is to “stay the course” and remain committed to your long-term investment plan.