The difference between the best and worst days to invest

I was recently asked if now is a good time to invest in the share market, to which I answered yes. In my view, trying to pick the best time to invest is futile. While there will be periods when the market offers better value, the difference between picking the very best day to invest each year versus the very worst day to invest was 0.7% per annum since 1990.

A longer investment horizon is recommended when investing in equities

‘Is now a good time invest’ is one of my most frequently asked questions. I typically answer this question with a question – ‘what are you saving for?’

Is it to travel the world, to retire early or achieve financial independence. This is important because what you are saving for influences the time horizon of your investment period, and time is one of the greatest equalisers when it comes to investing.

When investing in the share market, a longer investment time horizon (10 years plus) is a sensible starting point. Time helps to smooth out the natural ups and downs in markets and reduces the likelihood of experiencing a negative return. And the longer your investment timeframe, the easier it is to ignore all the noise and think and act for the long-term.

In my opinion those people saving to buy a home or requiring their capital back within the next 5 years should stick to term deposits.

Markets go up, and markets go down, that’s the nature of markets and investment cycles

When investing in shares, investors need to understand that share prices can go up and they can go down. Even the best companies in the world, have at times, fallen out of favour for one reason or another, and have seen their share prices decline.

The profitability of a company can also be influenced by the health of the broader economy and consumer. If consumers spend less, and economic growth slows, then this may impact the level at which a company is able to grow its revenues and profits through this period.

However, quality companies with healthy cash flows and a strong balance sheet that offer a product or service that continues to evolve to meet the needs of consumers will ultimately recover. We have seen this time and again throughout history.

One way to ensure that you are not entirely exposed to the fortunes of just one company is ensuring your portfolio is adequately diversified. This means holding a range of companies or funds, operating in different sectors and countries.

Investing in tranches or establishing a regular investment plan where you invest a certain amount of your savings into the share market every month, six months or year (i.e. over regular periods) will also help to reduce the likelihood of investing in less favourable market conditions.

The very small difference between picking the best and worst days to invest

While the price you pay for a share influences the total return you achieve, time and the benefit of compounding means that even an investor with the worst luck has only marginally underperformed the broader market.

Using the US market as an example, from January 1990 to December 2022, the S&P 500 index (including dividends) grew by 9.7% per annum.

Let’s assume that over this period you invested $10,000 each year into the US stock market.

On the off chance you managed to pick the worst day to invest every single year (i.e. the highest day of the year), you would have achieved an annual return of 9.6% per annum (including dividends).

So, your ‘bad timing’ has lowered your return by 0.1% per annum. That is not a bad result given this period included the bursting of the dot.com bubble in 2000, the worst financial crisis in history in 2007-2008, and the Covid pandemic in 2020.

Now assume that you had the best timing ever and managed to invest on the lowest day of each of these years. This would have resulted in an annual return of 10.3% per annum (including dividends).

So, over this 33-year period, the difference between picking the very best days to invest every year, and the very worst days to invest amounted to 0.7% per annum.

Compare this to someone who decided it was too difficult to try and time the market and put in place a plan to invest $10,000 each year on the 1 of April. This person would have achieved a return of 9.9% per annum (including dividends) and arguably would have had a lot more time and energy to devote to other activities.

Stay invested

By staying invested in markets and giving your investments time to recover (rather than selling out when the value of your investment turns down) is also a key part of building wealth over the long-term.

In the example above, while the person with the worst luck happened to invest their $10,000 every year at the highest point in markets, they also stayed invested. This meant that they fully participated in any uptick or recovery in markets and meant that their annual return over this 33-year period was just 0.1% lower than the broader market.

By missing just the 10 best days of performance in the S&P 500 over this 33 years period would have seen the annual return for the broader market reduce from 9.7% per annum to 7.2% per annum.

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