The realities of investing – The best days often occur near the worst days

In our third note on the realities of investing, we turn our attention to one of the biggest challenges investors face – staying invested during periods of uncertainty. While market declines can make it tempting to sell, it’s worth remembering that some of the strongest recovery days often occur close to the worst.

Markets move through cycles over time. Periods of strong returns are often followed by corrections or phases of heightened volatility, before the next recovery begins. While these fluctuations can feel uncomfortable, they are a natural part of investing in growth assets such as equities.

During these periods, it can be tempting to sit in the sidelines and wait for conditions to improve. However, the challenge is that the market’s strongest recovery days often occur when uncertainty is still high and sentiment remains fragile. These days can have a meaningful impact on long-term outcomes.

For example, a $50,000 investment in the S&P 500 made in January 1990 would have grown to around $2.0 million if you had remained fully invested, delivering an annual return of approximately 10.7%. However, missing just the 10 best days over this 35 and a bit year period would have reduced your annual return to around 8.3%, leaving your investment worth about $0.9 million. This $1.1million difference highlights how missing just a handful of the strongest days can have a significant impact on the value of your portfolio, and your ability to meet your long-term investment goals.

The impact of missing the 10 best days since 1990

A key reason for this is that the market’s best days often occur during periods of heightened uncertainty. Strong rebounds frequently happen shortly after sharp declines, when the economic outlook may still appear unclear and investor sentiment remains cautious. Investors who move to the sidelines during these periods can therefore find it difficult to get back into the market until well after the recovery is underway.

This is why market timing is so challenging. Successfully timing the market requires two decisions to be correct – when to exit and when to re-enter. While avoiding a downturn may seem appealing, predicting when markets will recover is far more difficult. Because recoveries can occur quickly and unexpectedly, many investors end up re-entering after a significant portion of the rebound has already taken place.

Understanding this pattern is an important part of long-term investing. Periods of market volatility are a feature of equity investing and have historically accompanied the higher returns that growth assets have delivered over time. Remaining invested through these cycles allows investors to benefit from the recoveries that have historically followed periods of market weakness.

Diversification also plays an important role in navigating market cycles. No one can predict with 100% certainty which asset class, sector or region will outperform in any given year. Spreading investments across a range of assets helps reduce the impact that any single market setback may have on your portfolio.

Taking a disciplined, steady approach to investing can also help you navigate uncertain markets. For example, investing new capital gradually rather than all at once can reduce the risk of investing funds at a market peak. Periodically reviewing and rebalancing a portfolio can also help ensure it remains aligned with your long-term goals and risk tolerance.

While markets will inevitably experience periods of uncertainty, history consistently shows that investors who remain focused on their long-term goals and stay invested through market cycles are generally better positioned to benefit from compounding over time.

In investing, time in the market – rather than trying to time the market – has consistently proven to be the more reliable path to building long-term wealth. While staying invested through market cycles may not always feel comfortable, history suggests it has been one of the most effective ways to grow wealth over time.nce doesn’t change – but real safety comes from protecting your future spending power.

Market Insights enewsletter

Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.

Subscribe Now