Key takeaways
- Missing a handful of the best days in the market over long time periods can drastically reduce the average annual return an investor could gain just by holding on to their equity investments during sell-offs.
- While missing the worst days can potentially offer higher returns than a “buy and hold” strategy, disentangling the best and worst days can be difficult, since historically they have often occurred in a very tight time frame — sometimes even on consecutive trading days.
What it may mean for investors
- There appears to be some benefit to missing both the best and the worst days, so an investor may wish to use tactical asset allocation adjustments in an effort to reduce equity exposure when the risk of a recession or bear market rises.
Our research suggests that missing a handful of the best days over longer time periods drastically reduces the average annual return an investor could gain by simply holding on to their equity investments during market sell-offs. Over the past 30 years, missing the best 30 days (based on S&P 500 Index returns from February 1, 1994, through January 31, 2024) took the annual average return from 8.0% per year down to 1.8%, which was less than the 2.5% average inflation rate over that same period.
Our research also showed that over the same time period, missing the best 40 days took the average annual return nearly flat to 0.44%, and missing the best 50 days resulted in a -0.86% annual return, on average. Based on this study, equities accumulated most of their gains over just a few trading days.
Missing the market’s best days
Sources: Bloomberg and Wells Fargo Investment Institute. Daily data: February 1, 1994 through January 31, 2024 for the S&P 500 Index. Best days are calculated using daily returns. For illustrative purposes only. An index is unmanaged and not available for direct investment. A price index is not a total return index and does not include the reinvestment of dividends. Past performance is no guarantee of future results.
What if an investor could somehow remain invested in the markets during the best days, but avoid the worst days? That would be the best of circ*mstances — and would result in far higher returns over the course of the holding period. But is that possible?
Our analysis shows that the best days in the S&P 500 Index tend to cluster in the midst of a bear market or recession, and some of the worst days occurred during bull markets. Of the 10 best trading days in terms of percentage gains, all 10 took place during recessions and six also coincided with a bear market, with three of those in the 2020 recession and the remaining days during the Great Recession of 2007 – 2009. Disentangling the best and worst days can be quite difficult, history suggests, since they have often occurred in a very tight time frame, sometimes even on consecutive trading days. In our view, these findings argue strongly for most investors to remain invested in the equity markets even during periods of high volatility.
Not only have the best and worst days typically clustered together, but they also often occurred during bear markets or recessions, when markets were at their most volatile. For example, three of the 30 best days and five of the 30 worst days occurred during the eight trading days between March 9 and March 18, 2020. Another historical study we conducted shows that missing both the best and the worst trading days during various time periods can result in somewhat higher equity returns than those of a traditional buy-and-hold strategy.
Although the difference may not be enough to account for trading and tax costs, it is interesting to note that, based on the historical returns in the chart below, reducing equity exposure during periods with significant market volatility improved returns (based on S&P 500 Index returns from February 1, 1994 through January 31, 2024).
Missing the best and worst days – Reduced exposure during market volatility.
Sources: Bloomberg and Wells Fargo Investment Institute. Daily data: February 1, 1994 through January 31, 2024 for the S&P 500 Index. Best days are calculated using daily returns. For illustrative purposes only. An index is unmanaged and not available for direct investment. A price index is not a total return index and does not include the reinvestment of dividends. Past performance is no guarantee of future results.
Since 1994, DALBAR's Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell, and switch into and out of mutual funds over short-term and long-term time frames. These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves. The results consistently showed that the average investor earned less — in many cases, much less — than mutual fund performance reports would suggest.3
Market timing is difficult — Investors who allow their emotions to get the best of them may suffer lower returns
Source: DALBAR, Inc., 30 years from 1993–2022; “Quantitative Analysis of Investor Behavior,” 2023, DALBAR, Inc., www.dalbar.com. For illustrative purposes only. DALBAR computed the average equity fund investor return by using industry cash flow reports from the Investment Company Institute. The Average Equity Fund Investor is comprised of a universe of both domestic and world equity mutual funds. It includes growth, sector, alternative strategy, value, blend, emerging markets, global equity, international equity, and regional equity funds. Returns assume reinvestment of dividends and capital gain distributions. The performance shown is for illustrative purposes only, and not indicative of any particular investment. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. Inflation is represented by the Consumer Price Index.
In 2021, the average equity fund investor underperformed the S&P 500 by 10.32% (28.71% for S&P 500 versus 18.39% for average equity fund investor).1
However, in 2022, the average equity fund investor finished the year with a loss of -21.17% versus an S&P 500 return of -18.11%; an investor return gap of 306 basis points.2 This gap ranked the third smallest annual gap in the past 10 years.
1 Average equity fund investor: The average equity fund investor is comprised of a universe of both domestic and world equity mutual funds. It includes growth, sector, alternative strategy, value, blend, emerging markets, global equity, international equity, and regional equity funds.
2 One hundred basis points equal 1%.
3 2023 DALBAR QIAB Report.
Strategies to manage volatile markets
We believe that staying fully invested in equity markets over a full market cycle is more beneficial than selling into volatile markets and attempting to avoid the worst-performing days. Historically, there appears to be some benefit to missing both the best and the worst days, so an investor may wish to use tactical asset allocation to reduce equity exposure when the risk of a recession and bear market rises and increase equity exposure as the economy and markets recover.
We also suggest rebalancing — buying asset classes that have fallen below a portfolio’s long-term allocations and selling those that are higher than long-term allocations — during periods of market volatility. We believe regular rebalancing can help to ensure that a portfolio’s allocation stays diversified and aligned with desired goals.
Diversification has the potential to provide more consistent returns and less downside risk through lowered volatility. Attempting to smooth the ride for investors is important because it can reduce the temptation to abandon a diversified portfolio when one asset class is outperforming or underperforming during a given time period. Attempting to reduce downside volatility can be critical to long-term performance because it can allow a portfolio to recover more quickly in the event of a catastrophic loss.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.
Different investments offer different levels of potential return and market risk. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.
S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.
The Consumer Price Index measures the average price of a basket of goods and services.
An index is unmanaged and not available for direct investment.
Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
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