What A Difference a Month (or Day) Makes

June 6th, 2008 at 07:31am Adam Larson

  Adam W. Larson, CFA

In a recent blog, I wrote about market timing and the cost of missing part of the recovery from a difficult market.  I thought it was interesting that recent market events reinforce this lesson. 

When the first quarter of 2008 ended, many investors worried that they should cash out before things could get any worse.  The S&P 500 Index (U.S. Large Stocks) had fallen 9.9% since the beginning of the year, and persistent news stories about Bear Stearns, oil prices, and the economy suggested the trend might continue.

We know now that the end of the first quarter was a terrible time to cash out of the stock market.  The S&P 500 Index rose 4.8% in the month of April – its best monthly percentage gain since December 2003.  The market added another 1.1% in May and is now only down 4.6% for the year (as of May 30^th).

Interestingly, a significant portion of April’s return came from a single day.  The S&P 500 Index rose 3.6% on April 1^st.  Missing this one day would erase most of the gains for the entire month.  Not only is it extremely difficult to predict the timing of future stock market returns, but being wrong by even one single day can be very costly.

Source: Historical daily prices of the S&P 500 Index from Yahoo.com

Entry Filed under: Financial Planning, Investments