Five days you don't want to miss

When we ask what an investor’s response to COVID-19 must be, we get told how to sustainably make money over the long term: ‘It’s important to spend time in the market and not try to time the market’. We also get told that it’s important not to change your long-term financial plan in the face of market uncertainly and volatility. 

Many think that this is true because over time, spending time in the market in growth assets (like equities) will gradually outperform defensive assets (like cash) by a margin. And over time, this differential will become material and will ultimately make a large difference to one’s financial outcome. 

This is true, but it’s not the whole story. 

A few outlier days can make a huge difference

The reality is that a large part of one’s overall accumulated wealth will not be determined by outperforming gradually over time, but rather by only a few critical days. It’s what I call outlier days that occur in the positive tail of investment returns.

An interesting analysis that was performed over the last 10 years shows that if you were to miss the best five days of returns in the last decade, the value of your investment portfolio would be 34% lower. This means you did everything right, almost all the time (for 3 645 days), but you wiped out a third of your savings. This reduction is larger than the effect of almost any other retirement debate you are likely to read about in the media, and certainly larger than any effect fees might have.

What causes these outlier days?

Interestingly, you can see very clearly that these five outlier days often happen when volatility is highest, and after market falls. Sadly, these are the times when many people feel the greatest urge to disinvest.

1. August 2011 stock market fall

The August 2011 stock market fall was a global market selloff because of fears of the contagion of the European sovereign debt crisis to Spain and Italy. Severe volatility of stock market indices continued for the rest of the year.

2. The US injection of $4.5 trillion over five years

The head of the United States of America Central Bank, Janet Yellen, confirmed the end of buying bonds in October after the injection of $4.5 trillion over five years. The government bond yields of the United States of America went up and foreign investors withdrew their capital from emerging markets. The South African Reserve Bank supported the South African currency and demand for South African bonds by increasing interest rates. 

3. Global financial conditions in 2015

June 2015 saw investors selling shares globally as a result of slowing growth in the gross domestic product (GDP) of China, a fall in petrol prices, the Greek debt default and the effects of the end of quantitative easing in the United States of America from the previous year.

4. Negative emerging market sentiment in 2018

2018 saw negative emerging market sentiment due to Argentina and Turkey, made worse by local political and economic drama. 

5. Our national lockdown in 2020

The South African government announced a nationwide lockdown in March 2020 to curb the spread of COVID-19.

Outlier days happens when the markets rebound

In each of these cases, the outlier days happened within or shortly after the turbulence when the market rebounded. These days separated the financial portfolios that remained largely unaffected, or even moved into positive territory, from those that were left in tatters. Investors caught out of the market after the falls would have destroyed a large portion of their wealth.

So, the truth about why you must stick to your strategy: It is not only because it’s the right play over the long term. It is also because you risk losing out on the few very precious outlier days that come around when we least expect them. 

So take a deep breath, keep a cool head and don’t miss a single day.