Ten days in the investment markets can have an enormous impact on any client’s portfolio. But because it is nearly impossible to predict which ones will be the best, investors should stay in the market and remain diversified, David Gluch, CFA, a director of U.S. product management for Invesco, said during a presentation at the IMCA 2012 New York Consultants Conference.
During a presentation called “Five Truths Investors Need to Know,” Gluch debunked five myths about investing.
First, the magnitude of gains and losses counts more than frequency, Gluch said. That overturns the idea that a portfolio will be fine if it has more up years than down years.
Second, the market’s worst days are just as important as its best days, rebutting the belief that missing the market’s best days is the worst mistake in a portfolio.
A single dollar invested in the S&P 500 from 1928 to 2010 would have a total cumulative return of $73.21, Gluch said. Had that dollar missed the 10-best market days during that period, it would have been worth $23.89, and had it missed the 10-worst days, its total cumulative value would have grown to $228.71, according to a table. Had the dollar missed the 10-best and 10-worst market days, its value would have grown to $75.01, compared to $19.31 had it remained in cash.
“Investors should remain invested, but seek to do that in a way that maximizes gains and averts losses,” Gluch said.
The “Tale of 10 Days” chart assumed that the dollar at the beginning of the period owned equities across the broad market, including small caps and securities that paid dividends to investors.
Gluch addressed the third myth, that market returns are the key to a portfolio’s value. But Gluch demonstrated that a saver who puts away 10% of a $100,000 income will realize $137,249 in a market with a 6% return, and contributions will account for 73% of that. In a market with a 12% return, the balance after 10 years would be $193,615, and 52% of that would come from contributions.
Fourth, Gluch told attendees that portfolios should always have prudent risk management strategies, as opposed to the thinking that says being prepared for disaster is unnecessary if there is no sign of a recession on the horizon.
Last, many investors believe that if they hold a lot of stocks, they are diversified. But Gluch reminded attendees that true diversification is based on the nature of the risks in the underlying securities, not their returns.
Donna Mitchell writes for Financial Planning.