J.P. Morgan Asset Management did a good analysis of this over a 20-year period from January 2002 to December 2022 and found that if you missed just the 20 best market days, your annual rate of return was cut in half to a paltry 2.63 per cent from the 5.33 per cent you would have earned if you had only missed the 10 best days. That’s also much worse than the 9.52-per-cent return if you had stayed fully invested.
Market corrections are where returns are made, so it is important to be careful when the doom-and-gloomers warn of the next great economic collapse and then sit on the sidelines with an all-or-nothing approach. But it is important to remember that risk management can come in many forms and there are many tools one can use beyond just fixed income. For example, we decided to reduce our duration risk in both stocks and bonds just as central bankers were starting to hike rates, and added inflation protection via low-duration assets.