Table 8.1: Should I Get Out of the Market?1
Period of Investment
Average Annual Total Return
Fully invested Missed the 10 best days Missed the 20 best days Missed the 30 best days Missed the 40 best days Missed the 60 best days
18.33% 9.24% 2.98% 2.07% 6.38% 13.07%
1This is based upon the S&P 500 returns from January 1, 1996–December 31, 2000. By jumping in and out of the market, the investor dramatically reduces the returns over time. Note that by just missing the 10 best days, the total return is reduced by nearly 50%. Miss- ing the 60 best days would have reduced the overall return nearly 200%.
Source: American Express Funds.
investors have been sucked in by this type of get-rich-quick form of investing. Because of their actions, there have been some wild days on the market, as prices go up and down.
Day trading is just another form of trying to time the market. How- ever, the turnaround time between buying and selling the equities is much shorter than for people who are engaging in market timing. As with market timing, people who day trade may find that their port- folios are in a far worse condition than if they had just left well enough alone.
Essentially, day trading involves purchasing stock at a, hopefully, very low price. Then, over the course of a short period of time, the trader watches the price of the stock very closely. Should the stock increase in price to where the trader would make a profit, the trader then sells the stock and purchases a different stock. Sometimes this means selling the stock when it is just a few cents higher than the purchasing price. Usually, the trader doesn’t hold the stock for more than a few days. Sometimes it is just hours, even minutes that the trader holds the stock.