Why a stock market bailout is likely a 'losing game,' says CFP.

The investor's psychological state can be volatile. Consider this common scenario: The stock market is going through a rough patch, and skittish investors bail out their money and put it on the sidelines, thinking it's a “safer” way to weather the storm.

However, the mathematics suggests – quite convincingly – that this is usually the wrong strategy.

“Getting in and out of the market, it's a loser's game,” said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta.

Why? Withdrawal during volatile periods may cause investors to miss the biggest trading days in the market – thus sacrificing significant profits.

Over the past thirty years, Standard & Poor's 500 The stock index generated an average annual return of 8%, according to a recent analysis by the Wells Fargo Investment Institute. It found that investors who missed the market's best 10 days during that period would have received a return of 5.26%, a much lower return.

Furthermore, missing the best 30 days would reduce the average gain to 1.83%. Returns would have been worse — 0.44%, or roughly flat — for those who missed the best 40 days in the market, and -0.86% for investors who missed the best 50 days, according to Wells Fargo.

Those returns have not kept up with the cost of living: Inflation averaged 2.5% from February 1, 1994, to January 31, 2024, the time period in question.

In short: Stocks saw most of their gains “in just a few trading days,” Wells Fargo reports.

“Missing a few of the best days in the market over long periods of time can significantly reduce the average annual return an investor can earn by simply holding their stock investments during a selloff,” she said.

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Unfortunately for investors, it is almost impossible to time the market by staying invested on winning days and bailing out before losing days.

Markets can react unexpectedly – and quickly – to unknown factors such as a strong or weak monthly jobs report or inflation reading, or the outbreak of geopolitical conflict or war.

“Markets are not only unpredictable, but when you have these moves, they happen very quickly,” Baker, an advisory board member, told CNBC.

Part of what also makes this so difficult: The S&P 500's best days tend to “cluster” in recessions and bear markets, when markets are “at their most volatile,” according to Wells Fargo. Some of the worst days have occurred during bull markets, which are periods when the stock market is on the rise.

For example, the 10 best trading days by percentage gains in the past three decades occurred during recessions, Wells Fargo found. (Six also coincided with a bear market.)

Some of the worst and best days followed in quick succession: Three of the top 30 days and five of the top 30 days occurred in the eight trading days between March 9 and 18, 2020, according to Wells Fargo.

“Separating the best and worst days can be very difficult, as history suggests, because they often occur within a very narrow time frame, sometimes even on consecutive trading days,” its report stated.

Experts said the mathematics strongly favors people staying invested amid extreme volatility.

For further evidence, look no further than investors' actual earnings versus the S&P 500.

The average investor in stock funds earned a 6.81% return in the three decades from 1993 to 2022 — about three percentage points less than the S&P 500's average return of 9.65% over that period, according to a DALBAR analysis cited by Wells Fargo. .

This suggests that investors' guesses are often wrong, and their profits decline as a result.

“The best advice, honestly, is to make a strategic allocation across multiple asset classes and stay on track,” Baker said.