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Proof that having a strong stomach pays off in the stock market

In 19 of the past 21 years, investors were whiplashed by market drops of over 7%, a number high enough to cause discomfort or even panic.

But as a recent Oppenheimer note points out, the market has only had a negative annual price return in just six of those years. In other words, the turbulence during the year usually doesn’t harm the bottom line.

It also means last year’s results — which saw an annual negative 7.03% price return for the S&P 500 index amid a drop of 19.78% at the market’s worst — is uncommon.

The reason why, according to Oppenheimer analysts, is because the markets have undergone “dramatic technological changes” and “have become much more prone to rotation, rebalancing, and profit-taking. Adding to these trends is globalization and more central bank transparency.

Investors get over good and bad news more quickly

Today, Investors have a ton more information at their fingertips and are making decisions much more quickly, and all these changes have made markets “quicker to discount both good and bad news and developments,” Oppenheimer’s note says. In other words, markets get over things quickly and move on.

Another note from Bank of America Merrill Lynch out Friday shows how this has changed over time: “Once upon a time (between 7th Sept 1929 & 22nd Sept 1954) it took 9,146 days for the S&P 500 to reach a new high following a >20% bear drop; this time S&P 500 took just 215 days to recover & surpass its old high.”

Though big picture economic cycles aren’t happening more frequently — on the contrary, the current expansion is exceptionally long — the pace for the market’s short-term ups and downs has quickened significantly.

The historic whiplash can be striking, especially around the financial crisis. The market was a disaster in 2008, with the S&P 500 index down 38.49%, the worst annual return in recent memory. But the following year it finished 23.45% higher — even when you factor in a horrible first quarter in which the market fell another 27.19%.

Market timing is even harder

Market timing is incredibly difficult already and ill-advised.

The stakes are high to get this right for those who do try. As the JPMorgan Annual Retirement guide says — many have noted this over the years — missing the best 10 days in the market absolutely kills portfolios over the long run. From 1999 to 2018, annualized return is 5.62%. If you missed out on the 10 best-performing days, your return would drop to 2.01%. Missed out on 20 of the best days in the market? Your return would sink to -0.33%.

It goes downhill from there; staying out of the best 60 days would give an annualized return of -7.41%.

All this becomes important to think about when confronted with the temptations of a market high. Right now, the S&P 500 (^GSPC) is near its all-time high, in sight of the 3,000 barrier, posing a temptation to wait until the market goes down a bit and then buy the market at a discount on the dip. But there may not be a dip.

Ditto for waiting it out longer. As recently as the end of 2018, financial Paul Reveres were crying “coming is the recession.” The index is up more than 16% year-to-date as of Friday morning. Sure, someone who bought at the bottom would be up big, but so would the person who bought a year ago and stayed in. It’s a fair bet that the market will be higher in 10 years. But in a month? Who knows.


Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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