Wednesday’s historic stock market rally — the third-biggest single-day gain for the S&P 500 index in the post-World War II era — contains an important and sobering lesson that investors everywhere would do well to heed.
After President Donald Trump announced on April 2 that the United States would slap tariffs on goods coming from dozens of nations, stock markets around the world went into free fall.
Over several recent trading sessions, millions of Americans felt the pain of seeing their net worth plunge as markets cratered.
It’s likely that during this rapid descent, at least some investors decided to bail on markets altogether and to go to cash until the smoke cleared and things looked more promising for stocks.
But those who did so may have missed Wednesday’s epic rally — and that’s a decision that could cost them dearly for many years to come.
Wednesday’s gains were the best for a single trading day in the past 17 years, with the S&P 500 rocketing 9.52% higher. The rally was a response to Trump’s decision to suspend many tariffs for at least 90 days.
While those who exited the market prior to Wednesday are probably now licking their wounds and regretting their decision, they might not fully comprehend the lasting damage they suffered by fleeing the stock market amid panic.
Researchers have found that simply missing out on the gains from a handful of the stock market’s best days can have a dramatic and very negative impact on one’s net worth.
As an article on the Hartford Funds website notes:
“Seventy-eight percent of the stock market’s best days have occurred during a bear market or during the first two months of a bull market. If you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83%.”
This is just one of the reasons why many experts, including renowned billionaire investor Warren Buffett, believe a buy-and-hold investment strategy is far superior to market timing.
Unless you know exactly when to jump out of the market and exactly when to jump back in (which would require a crystal ball), using a market-timing approach leaves you at risk of being out of the market on the days when millionaires are made.
It’s no fun to watch your stocks lose a large chunk of their value over the course of the week. But history suggests that the alternative — being out of the market when monster gains are being made — can be worse.
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