Every day, investors are becoming more and more nervous.
And fears of an upcoming correction are encouraging many to stay out of the market.
Now, I agree that there is a correction coming. It’s inevitable… all markets correct, eventually.
But most investors are going to be wrong about when the market will fall. That’s also inevitable.
And in the meantime, staying out of the market because you’re paralyzed by fear about a possible correction could end up costing you—a lot. Stock market returns are extremely concentrated. It might sound odd, but if you’re out of the market for just a few days—if they’re the wrong days—you could miss an entire generation of gains.
This is what happens if you miss the best weeks
To see just how much opportunity cost staying out of the market carries, we looked at the weekly performance of the Straits Times Index (STI) over the past 15 years. Next, we looked at how that performance would change if an investor was not invested during the index’s best-performing weeks.
From May 2002 to May 2017, the STI has had 783 trading weeks. Over that time, the index returned 226% (in U.S. dollar terms, including dividends).
The following table shows an investor’s performance if he missed some of the best-performing weeks of the index.
As you can see, if you were invested in the STI for 782 weeks, but you missed the best week of performance, your overall returns over the entire period would have fallen from 226% to 175%.
But that’s just the beginning. If you had missed the best-performing 10 weeks, you would have made just 22% during the period. And if you missed the best 20 weeks you would have been down nearly 35% over the period.
The thing to understand is that by missing out on the best weeks of performance, you don’t just miss out on those returns. You miss out on compounding. The returns you didn’t earn during those best weeks were not available to earn you more returns in the following weeks.
That’s why your total return at the end of the period would be so much less if you missed out on the best-performing weeks of the index.
Now, I’m not saying that you should stay 100% invested in the market all the time. Serious corrections can destroy your performance just as much as—if not more than—not being invested during the best weeks.
I’m saying don’t pull out of the market altogether because a correction might come. Instead, use stop losses to protect your downside.
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The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Kim Iskyan is the publisher of Stansberry Churchouse Research, a Hong Kong and Singapore-based independent investment research company, and the editor of Asia Wealth Investment Daily, a free daily e-letter with actionable insight about Asian investment, finance, and economics. He has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in emerging and frontier markets.