For sports fans, October included a great many surprises. I know a lot of people were shocked the Mets made it to the World Series. Perhaps an even bigger shock, however, was that my St. Louis Rams actually had a winning record headed into November (for the first time since 2006). Add to that Miami’s eight-lateral touchdown win over Duke on the last play of the contest – the ACC suspended the officiating crew for that one – and Michigan State returning a mishandled punt (which should have been routine) for a score to beat Michigan 27-23 as time expired. And while surprising, these events also provided us with some absolutely fantastic sports moments.
But for investors, October isn’t supposed to be so great. First, it’s one of the often-maligned “Sell in May and Go Away” months. Second, only three other months, historically, exhibit worse average returns: February, May and September. Those three months recorded negative average monthly returns of 0.1%, 0.2% and 1.1%, respectively. By comparison, the average return in October, historically, has been 0.5%.
This October, however, the S&P 500 Index managed to return 8.44%, which is 85% of the index’s annualized return for the period from January 1926 through September 2015.
History Repeats Itself
What’s more, the strong performance of the S&P 500 Index wasn’t an isolated case. The MSCI EAFE Index returned 7.82% last month, which is 83% of its annualized return from January 1970 through September 2015. And the MSCI Emerging Markets Index returned 7.13% in October, which is 67% of its annualized return from January 1988 through September 2015.
While the returns provided last month by the S&P 500 Index, the MSCI EAFE Index and the MSCI Emerging Markets Index were exceptionally strong, they aren’t all that uncommon.
Historically, the S&P 500 Index has produced even higher returns in 4.5% of months. This means the index has posted such a month about once every 22 months since 1926. In the case of the MSCI EAFE Index, it produced higher returns in 6.9% of months, or about once every 14 months. In the case of the MSCI Emerging Markets Index, it produced higher returns in 17.8% of months, or more than once every six months.
The figures above illustrate how difficult it is for investors to time the market, specifically because so much of its total returns occur over such short and – virtually by definition – unpredictable periods. In other words, staying disciplined and ignoring the noise of the markets – the S&P 500, for instance, lost 8.5% from August through September – is a key ingredient of a successful investment strategy. Here’s another example from an earlier study:
There are 1,068 months in the 89-year period from 1926 through 2014. The best 89 months – an average of just one month a year, or only 8.3% of the total number of months – provided an average return of 10.5%. The remaining 979 months, or 91.7% of the total number of months, produced virtually no return at just 0.08%.
Legendary investor Peter Lynch offered another illustrative example. He pointed out that an investor who followed a passive investment strategy and stayed fully invested in the S&P 500 over the 40-year period beginning in 1954 would have achieved an 11.4% rate of return. If that investor missed out on just the best 10 months, or 2% of them, his return dropped 27%, to 8.3%. If the investor missed the best 20 months, or 4% of them, his return dropped 54%, to 6.1%. Finally, if the investor missed the best 40 months, or 8% of them, this return dropped 76%, all the way to 2.7%.
The Bottom Line
Do you really believe there is anyone who can pick out the best 40 months in a 40-year period? Lynch put it this way: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
John Bogle, Vanguard’s legendary founder, said this about market timing: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”
Perhaps legendary investor Bernard Baruch said it best. “Only liars manage to always be out during bad times, and in during good times.”
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