Why Staying Invested Matters: The Cost of Missing the Best Market Days

Stock market volatility can often make investors feel uneasy, especially when downturns are sharp and chatter in the investment world turns negative. While short-term declines often attract the most attention, historical market data show that in some cases, strong recovery periods can occur shortly after, which is one of the reasons why the concept of staying invested is a commonly agreed-upon idea in the investment landscape.

In other words, staying invested generally entails keeping investments through market ups and downs instead of moving in and out of the market based on short-term price changes. The concept matters because timing the market can be difficult in practice.

This guide explains what staying invested means, why some investors may choose to exit the market during periods of volatility, common misconceptions, and why this idea should be considered an educational principle, rather than a universal rule in investment strategies.

What “staying invested” means

Staying invested typically refers to remaining invested during short-term market fluctuations instead of making sudden decisions based on fear, recent headlines, and price swings.

Staying invested vs. reacting to short-term market moves

The underlying principle behind "stay invested" encourages refraining from short-term, emotional decisions when it comes to exiting the stock market. It does not mean that the market will predictably increase, and it does not suggest that market volatility is inconsequential. Instead, it illustrates the idea that market fluctuations can occur suddenly in both directions, and that not being invested in the market at the right time could impact long-term investment growth.

Market timing refers to moving money in and out of the market, or between different investments during short-term price fluctuations. The difficulty is that short-term market moves can be hard to predict consistently. FINRA (opens in a new tab) notes that some of the market's biggest gains and losses can occur over a couple of days, which may make reacting to these short-term swings difficult to manage effectively, which is where the concept of staying invested comes into play.

Staying invested does not mean ignoring portfolio risk

At the same time, staying invested doesn't mean investors should refrain from reviewing or adjusting their investment portfolios. Portfolio risks are still present and should not be ignored.

Diversification, asset allocation, and rebalancing remain important. Get Smarter About Money (opens in a new tab) states that having a diversified portfolio can aid investors in spreading their risk across different asset classes, while rebalancing involves adjusting a portfolio over time to maintain intended fund allocations given market conditions. In other words, staying invested does not mean ignoring these risks; it involves active participation.

Why investors may be tempted to leave the market during volatility

Market volatility may evoke strong emotions among investors. Even experienced investors may feel uncertain when the market experiences sudden falls. Behavioural research shows that humans are naturally subject to loss aversion (opens in a new tab), which is the idea that the pain of losing money often feels more substantial than the satisfaction experienced when gaining the same amount. This tendency can lead to short-term reactions, even with long-term goals in place.

While some may feel more comfortable waiting for their emotions to pass before making any investment decisions, others may make emotional decisions based on the short-term losses that prompt them to act.

Why uncertainty may lead to short-term decisions

Sharp downturns can create an impression of immediate risks, pushing some investors to exit the market temporarily. This is emphasized by media coverage that often reports on sudden market drops, which can further create the impression that immediate action is needed.

However, Get Smarter About Money (opens in a new tab) notes that even though markets fall, long-term investment strategies often account for fluctuations, especially in a diversified portfolio where risk is spread out strategically. Highlighting the idea that short-term reactions can be costlier in the end.

Why timing may feel easier in hindsight than it is in practice

In hindsight, market timing may seem straightforward, but in real-time, predicting when the best time to enter and exit the market can be challenging. Some of the strongest and weakest market days often occur close together, making timing the market difficult. For example, investors who try to avoid market downturns may unintentionally miss recovery days, which can impact their long-term growth and returns.

The combination of emotional responses and the apparent simplicity of market timing in hindsight can explain why many investors may consider leaving the market during volatile periods, despite research showing otherwise.

The cost of missing the best market days

Market gains aren't evenly distributed over time. Instead, a relatively small number of days with strong market gains can account for a much larger portion of overall long-term growth than most days.

Why a few strong days can matter disproportionately

Historic performance data from Vanguard suggests that markets don't produce consistent returns day over day. A small number of high returns can account for a large portion of overall gains over a long period. Vanguard analysis cites a hypothetical example (opens in a new tab) that invests $100,000 in the S&P 500 index from 1988 to 2024. For illustrative purposes, it shows how that $100,000 invested would have experienced notably different results depending on whether the investor remained invested or missed some of the strongest return days. Average annualized returns:

• 11.1% if fully invested

• 8.9% if the 10 best days were missed

• 7.3% if the 20 best days were missed

• 6.0% if the 30 best days were missed

Why strong recovery days can be easy to miss

One of the reasons strong days can be easily missed is that they may happen during periods when markets are still volatile. Emotional responses to this volatility can lead investors to exit temporarily, which, in turn, can result in missing days with notable price increases, especially when turnarounds are sudden. Ultimately, the proximity of strong and weak days can make timing the market short-term challenging for most investors.

How historical illustrations are typically presented

One thing to note is that these illustrations are not predictive of future performance. They show how certain sequences of returns played out historically over set periods of time. They don't guarantee future returns or suggest that all investors will experience the same outcomes.

Therefore, when using historical examples, investors may consider confirming that the following information is shared:

• The index used.

• The time period.

• Whether dividends were included.

• That the returns are hypothetical.

• The past performance does not guarantee future returns.

Why the time horizon can matter in investing

Time horizon refers to the expected length of time that an investment is held before funds are withdrawn. How long money is invested will impact how market fluctuations are experienced.

What time horizon means

A longer time horizon generally means that an investor anticipates holding their funds for several years or decades before they will need them. This extended timeframe may provide more opportunity to endure short-term volatility and benefit from long-term growth trends.

On the other hand, a shorter time horizon may alter how short-term market downturns affect an investment strategy and could require a different approach to tolerating risk. Ultimately, the ability to remain in the market through poor market performance will differ when investment goals are years versus decades away.

Why time horizon change the conversation around volatility

Time horizons don't point to a single "right" investment choice. It can, however, help contextualize short-term market fluctuations with long-term investment goals. For example, investors planning their long-term objectives may view short-term declines differently than someone who requires access to their money sooner. In other words, there are no universal rules that work for everyone.

Staying invested is not the same as ignoring risk

Even when investors remain invested through up and down markets, it doesn't mean that risk entirely disappears. Investments can still lose value, which is why portfolios may need to be reviewed consistently in order to stay aligned with long-term investment goals. Remember, the concept of staying invested is about avoiding reactionary responses based on short-term market changes, not about ignoring risk.

By maintaining a long-term mindset, investors may find it easier to navigate volatility while mitigating risk. Regular monitoring, risk tolerance, and portfolio rebalancing are key to maintaining investment strategies that reflect long-term goals.

Why diversification and asset allocation can still matter

Diversification spreads investments across different asset types, market sectors, and geographies, while asset allocation determines the portion of a portfolio that's held in bonds, stocks, cash, and other investments. Both are important in managing risk.

The goal of a diversified profile is to reduce the impact of market swings. How? It does so because investments don't move in the same direction or by the same amount simultaneously. Note that the SEC (opens in a new tab) indicates that there is no single asset allocation framework that is right for every financial goal. Therefore, by tailoring diversification and asset allocation strategies to individual long-term goals and risk tolerance, investors can experience a more balanced approach that aids in preventing short-term downfalls from determining long-term outcomes.

Dollar-cost averaging

Another tool that may help investors manage their risk levels over time is dollar-cost-averaging (opens in a new tab), which involves investing fixed amounts into their portfolio regularly, regardless of current market conditions. This approach may help mitigate the overall impact of short-term swings by spreading contributions over time, rather than trying to time the market perfectly.

The oversimplification of "staying invested"

Oftentimes, the term "stay invested" can be mistaken for instructions to ignore risk or leave portfolios unchanged forever. In reality, it details the principle of maintaining exposure to the market over time while still considering risk and modifications. With periodic reviews, rebalancing, and risk tolerance assessments, investors may find it easier to maintain alignment with their long-term investment goals.

Common misconceptions about market timing and staying invested

Even seasoned investors can misunderstand the meaning behind staying invested and how market timing affects long-term returns. Some of the most common misunderstandings include:

“Waiting for certainty reduces investment risk”

Waiting for the ideal market conditions may appear safe, but historical trends show that markets can rebound unpredictably. Even short-term absences from the market can result in meaningful missed opportunities, as strong gains can occur quickly and without warning.

“Missing only a few days would not matter much”

Even a small number of long-term days can have a meaningful impact on long-term growth. Remember the hypothetical example from Vanguard above that shows how a $100,0000 investment in the S&P 500 index from 1988 to 2024 could grow notably less if even 10 ideal market days were missed.

“Staying invested means never reviewing a portfolio”

Remaining invested in the market does not eliminate the need to review an investment portfolio over time. Rebalancing and assessing risk consistently can help ensure investments mirror long-term objectives, while helping prevent short-term volatility impacts. Ultimately, strategic asset allocation and periodic adjustments are some of the key components in managing investments.

“Volatility automatically means an investment plan is broken”

Short-term volatility is a normal part of investing. It does not suggest incorrect investment strategies. Instead, it illustrates the benefit of maintaining a long-term perspective. By understanding the ups and downs of a market, investors can maintain their focus on long-term growth potential without reacting impulsively to temporary downturns.

Conclusion: Staying invested, market volatility, investment decisions, and long-term growth potential

Market volatility is a normal part of investing, and short-term fluctuations do not automatically suggest there is a problem with long-term investing goals. History shows that brief absences from the market can reduce long-term growth potential, while maintaining a thoughtful investment strategy can help investors remain cohesive with their financial goals. By understanding how time horizons and risk interact with one another, investors can make more informed decisions about their funds, rather than ones that are reactionary and based on high-stress emotions.