REUTERS/Sue Ogrocki

The past two months have been challenging for stock market investors. The S&P 500 quickly tumbled 9.8% from its Sept. 19 all-time high of 2,019 to as low as 1,820 on Oct. 15.

Because of the way our brains work, most of us worried about the possibility that this correction was turning into an outright market crash. Our instinct was to dump stocks. Surely, many investors sold and told themselves they would "wait out the volatility" on the sidelines. A confident few likely even shorted the market.

However, history shows this is the most classic mistake investors make. So, kudos to those who held on to their long positions.

"Corrections are part and parcel of the investment process, they come and go, and it is imperative to take a deep breath and realize that what is most important for building wealth is not 'timing' the market but rather 'time in' the market," David Rosenberg said on Oct. 14. The S&P has been surging since Rosenberg wrote that.

"Time in" the market is crucial, especially when things get scary for investors. There's tons of data on this. We talk about it all of the time. Even the folks who sold the sell-off probably know about it. But let's revisit some of the data anyway.

Missing A Few Good Days Will Destroy Your Long-Term Returns

When volatility picks up, it's tempting to trade in and out of the market with the hope you'll protect your wealth. Unfortunately, this increases the risk you'll miss some of the best days in the market. And that can be very costly.

JPMorgan Asset Management illustrated how much an investor's returns collapsed when they missed a few of the best days in the market. They found that if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would've had a 9.2% annualized return.

However, if trading resulted in missing just the ten best days during that same period, then those annualized returns would collapse to 5.4%.

cotd stock market missed returns More

JP Morgan Asset Management

Missing these days do so much damage because those missed gains aren't able to compound during the rest of the investment holding period.

"Plan to stay invested," they recommend. "Trying to time the market is extremely difficult to do consistently. Market lows often result in emotional decision making. Investing for the long-term while managing volatility can result in a better outcome."

The Best Days In The Market Come After The Worst Days

Some of the worst days in the market follow down days in the market. That seems to make sense intuitively.

However, some of the best single days in the market also follow some of the worst days. Here's a table from Wikipedia putting the S&P 500's 20 worst days next to 20 best days.

best days More

Wikipedia

This is just the nature of how the stock market moves. Bear markets don't go straight down and bull markets don't go straight up. When you look closely, they are marked by good and bad days, good and bad weeks, and so on. During periods of volatility, the magnitude of up-moves are just as big as the magnitude of down-moves.

Investors Buy High And Sell Low

So far, we've been largely talking about hypotheticals. Now, let's take a look at how bad we really are at investing.

Last year, investment strategist Gerard Minack studied the timing and volumes mutual fund flows to see how investors' actual returns compared to movements in the market. As expected, he found that inflows became most aggressive as markets peaked and outflows ramped up when markets were near their lows.

As a result, the dollar-weighted return of the investors' portfolios lagged the benchmark indexes by extremely wide margins.