State of the market

The '40 days argument' is often cited as a reason for remaining permanently invested in the equity market. Here's how the logic goes. There are about 230-240 trading days per year. On most sessions, there are small negligible moves in either direction and these small moves largely cancel out. The broad American index S&P 500 was launched back in 1928. Various stocks have been replaced across this period and there have been times when trading was suspended due to war, etc. But the index has returned about 10 per cent compounded, annualised over the next 89 years! Most of the gains have come from just 40 critical sessions where there was a big jump. It is naturally impossible to predict in advance when one of those big sessions would occur. So only an investor who was continuously invested would have received the full benefit of those gains. Don't take these 40 days in 89 years literally. The statistics will differ from market to market and also differ on the basis of how a 'big' move is defined. But the logic is intuitively appealing. Market returns are normally distributed. This means that most sessions are tightly banded within one or two standard deviations around the mean (average) daily return. There are disproportionate large gains (and losses) only on outlying sessions, which occur rarely. If you miss those rare big sessions, your returns will be mediocre. Timing the market to pick up those big sessions is impossible. Hence, the argument in favour of a continuously-invested strategy. The c

This article was originally published on May 11, 2017.