Want To Dance In And Out Of Shares? Look At This and Think Again

I recently wrote about how the Straits Times Index (SGX: ^STI) in Singapore had generated its best returns during times of serious turmoil in the financial and economic landscape.

A deeper look into the data also revealed that the 10 days with the best daily returns for the index were responsible for almost the entire bulk of its returns. Between 1 May 1992 and 18 December 2013 (the timespan I had tracked), the Straits Times Index had earned an average of 3.48% per annum; if an investor had missed those 10 best days, his returns would become almost non-existent at 0.12%.

Naturally, one could say that an investor’s returns would be fantastic if only they had missed the 10 worst days. And, that’s true: A 3.48% annualised return for a simple buy-and-hold investor would have jumped to 8.68% if he had side-stepped the landmines. That’s a big difference in returns. But, here’s something interesting: Most of these “bad” days happened within very close proximity of the “best” days.

For instance, the index’s best day ever in those 22 years happened on 8 February 1995 when it rose an astonishing 36.95% according to S&P Capital IQ. What about the worst day for the index? That’s 9 February 1995 when it collapsed by 28.14%. Given such evidence, it’s hard to imagine anyone being able to avoid the worst days and yet jump in perfectly to experience the best days without it being solely due to luck.

This excursion through market history has been interesting for me because it drives home the point of why it just wouldn’t make sense for an investor to try to time the market if he wants to really stack the odds of success in his favour.

Trying to catch the peaks and bottoms of the market (unsuccessfully) has been a costly exercise for many investors. In contrast, staying invested for the long-term – measured in years and decades – has been shown to help greatly increase the odds of success for an investor in the share market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.