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Investment Advice & Risk Jun 04, 2019

The Sense in Staying Invested

Social Security

In a February 2019 article from, Larry Swedroe told readers the vast majority of market returns come from a very small portion of the overall results. Most investors would not be surprised that from 1927 through 2018, the S&P 500 Total Return index returned 9.9% annualized*. Swedroe discussed how the top-performing 92 months out of this 1,104-month period produced a 10.4% average monthly return, but the remaining 1,012 months produced only .01% average monthly return. The top 92 months, which is 8.3% of the total 92-year time period, produced nearly 100% of the market return . . . or so it seems.


These statistics led Swedroe to recommend, among other things, that you should stay disciplined and invested in your asset allocation and not panic because of market news. I agree with this recommendation, but not on the basis of just the statistic he provided. In order for me to endorse the “stay invested” strategy, we also need to look at the rest of the 1,104 months of market returns, and we need to compare the best of the months to the worst of the months. If we analyze only the bottom 92 months, we get an average monthly return of -9.8%. If you compare this average to the top 92 months, you see that the comparison is much more even than just comparing the top 92 to the balance of the months’ returns. Since negative returns are more impactful than positive returns, the bottom 92 months actually reduce assets more than the top 92 months increase assets.


If we were to stop our analysis here, we might conclude that it makes sense to try to hit the big up months and miss the big down months, which would be true if these two number sets were the only returns factored into the 9.9% annualized total return of the 92-year period. If we remove the top 92 and bottom 92 months from the 1,104 monthly returns and only look at the middle 920 months, we get a better idea of the whole picture. The average monthly return of the middle 920 is 1.1%. These months represent 83.3% of the overall returns of the period. A 1.1% average monthly return is not flashy, but it is substantial. This small average monthly return adds up to 1,012% of the overall return of the period, while the top 92 and bottom 92 monthly returns total 956.8% and -901.6%, respectively.


In reality, we know that hitting all top 92 and missing all bottom 92 is likely impossible, or at the very least, would be extremely lucky. While I believe that Swedroe is right that investors should stay invested and not react to every piece of news about the market, I believe it for a different reason: You are rewarded for staying invested over the long term. If we assumed the bottom 92 and top 92 months had a return of 0%, the annualized return over the 92-year period would be 10.6% and better than the 9.9% annualized return we would have received from the actual results of the market.


The bottom line is that it is hard to tell when the market will have sharp ups and downs, but if you know you have a long-term timeframe, you can reasonably count on the market to reward you for it. If you are constantly out of the market, attempting to time returns, you could hit a big market or miss a bad market, but you also could be missing all of the middle months that make up a potentially larger portion of the return. For a retirement portfolio, this is very important in outpacing inflation for the long term. We recommend developing a strategy that allows for periodic adjustments but also allows stocks to do what they do best over long periods of time: go up.

*The annualized return statistic is corrected to 9.9% per research by the author, where Swedroe’s article had it at 10.1%. The rest of Swedroe’s calculations appear correct.

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