Editors' pick: Originally published Aug. 4.
How many times have you heard that "It's not about market timing, but time in the market?" It's a classic line delivered by investment salespeople every day.
And the thing is, it's true.
Buying low and selling high is incredibly hard to do consistently over time. Staying invested in the market, whether through an ETF, a mutual fund or a well-diversified portfolio of individual stocks, is one of the best ways to make money over time.
Some investors don't stay invested because they're afraid of big market losses. But the bigger concern should be missing out on the best performing weeks.
Missing the Highs
To see how much missing a market's best performing weeks can affect your overall returns, we looked at the weekly performance of the MSCI Asia ex Japan Index since 1988.
The MSCI Asia ex Japan Index has had 1,489 trading weeks since January 1988. Over that time, its average annual return was 5.8%, or 0.11% a week. That's a 400% accumulated return (not including dividends) since 1988.
The table below shows what would have happened if you had been invested all 1,489 weeks but missed some of the best-performing weeks.
Missing the best performing week (the week of February 6, 1998, when the index gained 13.6%) would have earned you 60% less in accumulated returns than what you could have earned if you were invested for all 1,489 weeks. (That's partly the result of that 13.6% weekly gain compounding over time.)
An investor who was invested for 99.7% of all weeks -- meaning he missed just the best five trading weeks -- would have earned about 200% since 1988. That's a drop from a 5.8% annual return, to a 3.9% annual return.
But if your market timing was precise but horrible, and you managed to somehow miss the 20 best performing weeks, your accumulated returns over 1,489 weeks would just be 12%, or 0.4% a year. That's a big drop for missing just 1.3% of all trading weeks.
All the positive performance of the MSCI Asia ex Japan Index was due to the 22 best performing weeks from 1988 until now. (If you missed the best 23 weeks, you would have earned a negative 4.1% return.)
(Note: These figures reflect actual index performance, excluding dividends. Normally you would own an index using an index fund or ETF, like the iShares MSCI Asia ex Japan ETF (AAXJ) . So, your returns would be slightly lower than what we just discussed.)
Miss the Big Weeks and It Will Cost You
To better show the impact of missing the best weeks, the figure below compares these annual returns to a 1-year Singapore T-bill -- a safe, low yielding investment.
If you missed the 20 best weeks, you would have earned just a quarter of what a 1-year T-bill would have paid you over the same time period.
But an investor who stayed invested throughout the entire period would have earned annual returns of 5.8%. This shows that it pays to stick with the stock market through good and bad weeks because in the end you will come out ahead. Trying to pinpoint the best time to buy and sell will only end up costing you money.
So, stay invested. Market drops are scary, but what's really terrifying are the forgone gains that come from missing just one really good week.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.