Introduction
In a previous post, we explored what market timing is and why it’s so difficult to execute successfully. Today, we will dig deeper into one of the most striking findings from decades of academic research: the outsized impact of just a handful of trading days on long-term equity returns.
The evidence is sobering. Missing the market’s best days can dramatically reduce your wealth over time. Let’s look at what the research says.
The Power of Just a Few Days
Financial markets don’t move in smooth, steady increments. Instead, long-term returns are heavily concentrated in a surprisingly small number of trading days.
- Javier Estrada (2007): In his paper “Black Swans and Market Timing: How Not to Generate Alpha”, Estrada analyzed over 160,000 daily returns from 15 international equity markets. He found that missing the best 10 days in each market reduced portfolio values by about 50% compared to staying fully invested. Conversely, avoiding the 10 worst days more than doubled returns. But here’s the catch: identifying those days in advance is nearly impossible. For perspective: these 10 days represent less than 1% of the trading days considered in a typical market, the chances of successfully timing the market are therefore incredibly slim.
- Dimensional Fund Advisors (2023): Their analysis showed that if an investor had put $1,000 into the Russell 3000 Index at the start of 1998 and left it untouched for 25 years, that investment would have grown to $6,356 by the end of 2022. Missing just the index’s best week during that period would have lowered the ending balance to $5,304, while missing the three best months would have reduced it even further to $4,480.
- JP Morgan Asset Management (2021): Research highlighted in this article shows that selling investments during major market downturns can lead to significantly reduced long-term returns, as the market’s best days often occur soon after its worst. For example, a $10,000 investment in the S&P 500 from 2005 to 2024 would have grown to $71,750 if left untouched, but missing just the 10 best days would shrink the outcome to $32,871, and missing the 60 best days would reduce it to $4,712, reducing the portfolio to less than the original $10,000. The research emphasizes that while market volatility triggers a “fight or flight” response, staying invested is historically the best way to benefit from eventual recoveries and new market highs, rather than attempting to time exits and re-entries. Note that the numbers may differ for other periods or indexes, but the impact is broadly similar no matter the exact number of days missed.
Please note that the three sources described above all use different timeframes and indexes, but all reach the same conclusion: missing the best days devastates returns.
Why Are the Best Days So Hard to Catch?
- They Often Come After the Worst Days: Many of the strongest up-days happen right after panic-driven selloffs. Investors who flee to cash during downturns often miss the recovery rally.
- Volatility Works Both Ways: Markets swing violently during crises, with big losses and big gains close together. Trying to sidestep losses often means missing the rebounds too. Investors think they can avoid the worst days, but since the best and worst days cluster, trying to sidestep downturns often means missing the recoveries too.
- Timing Precision Is Impossible: To succeed, you’d have to exit before the worst days and re-enter before the best ones. History shows this is virtually unachievable, even for professionals.
The Long-Term Case for Staying Invested
The message from these studies is consistent:
- Time in the market beats timing the market.
- Missing even a small number of great days devastates returns.
- Since the best and worst days are unpredictable and often clustered, the safest path is to remain invested through the volatility.
Dollar-cost averaging, broad diversification, and sticking to your plan through market cycles are far more effective strategies than trying to call the next big swing.
Final Thoughts
The evidence against market timing keeps piling up. Whether you look at Estrada’s international analysis, DFA’s long-term U.S. study, or JP Morgan’s practical 20-year window, the conclusion is the same: the odds are stacked against anyone trying to hop in and out of the market.
Missing the market’s best days isn’t just a small mistake. It can cut your wealth in half.
The smarter move? Stay invested, ride out the downturns, and let compounding and recoveries do the heavy lifting.
The evidence is overwhelming: staying invested beats trying to outsmart the market. Missing the best days isn’t a small misstep. It’s the difference between building wealth and falling behind.