Source: Ned Davis as at 31-Dec-18 distributed with the consent of Miller Value Partners.
Past performance is not a guide to future performance.
This analysis illustrates the significant impact of missing some of the best days of market performance on an investor’s average annual returns.
Investing for the long-term
Recent research1 from financial services firm, Morningstar, indicates that ‘time in the market’ will typically lead to solid results. The report asks the question: “Is there a good time to buy or sell actively managed funds?”
The report concludes that there isn’t. Why? Because most of the positive equity performance over the past few decades has occurred over a few months. Therefore, being out of the market for these critical months can have a severe impact upon overall wealth generation.
Morningstar’s Paul Kaplan says: “Over the long haul, the stock market’s outperformance over cash boils down to a short time period. Miss those months and you will have missed all the risk premium to be earned from holding a volatile asset such as stocks.
“Between January 1926 and October 2018, U.S. large-cap stocks owed their outperformance over cash to just 51 months—less than 5% of the months in the sample. If you held stocks for all 1,063 months apart from those 51 months, which we’ve called ‘critical months,’ you would not have beaten cash.”
Jamie Farquhar, Director at Square Mile Investment Consulting and Research, adds: “Ultimately, the long-term return to the client is key. When an adviser constructs a portfolio for a client, he or she must demonstrate an investment horizon tailored to the client’s needs using essential means like risk-profiling tools or a risk-profiling questionnaire. It’s all about suitability and due diligence in the adviser/client relationship.”