Morningstar: You Can’t Time the Market

Morningstar’s director of investment research, Ian Tam, discusses the importance of staying invested during “critical months” in a recent video.

Tam explains the “critical month” concept as the notion that an index’s performance is “often dependent on a very short period of performance history.” He offers data related to the 2000 tech bubble which shows that “had you missed the one best month of performance within that given year, your performance that year would have been about negative 18%. But had you been invested during the entire year despite it being a negative year in equities, your return would have been closer to negative 11% or negative 12%.” While still not a strong performance, he notes, the outcome was better.

Citing a 2018 Morningstar study of 3,700 global funds spanning a 15-year period, Tam explained that, on average, there were only about 7 critical months: “So, the dependence on outperformance during those months is very small compared to the amount of history that we’re actually looking over.”

He concluded by advising investors to stay invested, “despite the fact that there’s a lot of volatility because the performance of your fund over the long term depends on a very small period of time.”