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 circumstances — 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.
