Long Term > Short Term

Posted by Jacob Radke
November 14, 2023

Over the course of a year there are around 252 trading days. Of those 252 days about 120 are down days and 132 are up days, on average. Being invested over those 12 days is vital.

But it is impossible to understand when those 12 days are arriving, because you don’t know when they occur until after they happen.

Below is a chart of the S&P 500 year to date with weekly price changes.

This year it is likely that those 12 days were in January, the aftermath of the collapse of SVB, and last week.

Year to date, the S&P 500 is up around 15%, a heathy lead over the long run annual average.

However missing the first 22 trading days alone, good or bad, would mean you would have a 0% return year to date, excluding last week’s rally.

Missing the days following the collapse of SVB would mean you would have a 0% return, excluding last week’s rally.

And missing last week but being invested for the rest of the year would have slashed your return by about half.

There is some interesting research about individual’s returns versus index/asset class returns.

“Research suggests that real investor returns are not just a little but are far below investment asset class or index returns. Dalbar gathers data on real investor returns in real portfolios. In 2016 Dalbar reported that the average investor in all US equity funds earned 3.7% annually over the last 30 years, a period in which the S&P 500 index returned 11.1% annually. Retail investors underperformed the S&P index by a very large 7.4% annually. Across all assets investors underperformed by 4.3% annually. Money flowing into and out of positions reduced returns and most investors chose active funds which underperformed indexes by 1% annually or more on average. Dalbar says the biggest factor in investor underperformance is that investors chase bull market returns up in price then dump positions after bear markets have caused too painful a decline in equity prices - greed, then fear.” - in a post from Evanson Asset Management, January 2021.

Essentially, the point is that trying to find the bottoms and tops over the course of a year leads to long term underperformance.

The index never misses and up, or down, day. The trader going in and out does.

Now it is also important to keep in mind that investment returns are not the end all be all. The planning around them can sometimes make or break the difference between market and your returns.

Meaning tax strategies, types of accounts, large purchase planning, etc. all can enhance life returns and financial returns.

Scale your financial life with Fjell Capital - get a dedicated team, 3 meetings a year, unlimited phone calls, texts, and emails, an annual progress report, meetings designed around our 29 foundations, and professional asset management.
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