Short Bursts & Marketing Timing

By Ben Dolan, CFP®

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In the chance that you’ve only been following politics for the last week or so, you may have missed an interesting lesson in the markets: timing markets can prove futile because they “tend to have bursts of large gains (or losses) that are concentrated in a relatively small number of days” (from The Investment Answer by Goldie and Murray, pg 43).

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Lately, when speaking with prospective clients and performing portfolio evaluations on their behalf, I’ve noticed a trend of holding a relatively large portion of large cap growth stocks (usually names that have rallied more recently, like Nvidia, Microsoft and Tesla). Typically, the buy date on these stocks is NOT prior to the large gains in the stock, they are somewhere on the way up, indicating the prospect is chasing performance in the hope the stock price will continue to rise (also known as rear-view-mirror investing).

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What I see less often, and sometimes not at all, are small cap stocks in prospective client portfolios (per Investopedia.com, small cap stocks are companies with a market capitalization of $300 million to $2 billion).

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Over longer investment horizons, as seen in much of the research provided by the University of Chicago and Dimensional Fund Advisors (DFA), small cap stocks have tended to outperform large cap stocks. However, this outperformance does not happen each year (or even every five-year or ten-year period). Thus far, 2024 is one of those years that small cap US stocks have trailed large cap US stocks. In fact, as of a week ago, on 7/10/24, the year-to-date return of the Russell 2000 (the most well-known index tracking small cap US stocks), was a meager 0.10%, according to the Wall Street Journal, while the year-to-date return of the S&P 500 (the most well-known index tracking large cap US stocks) was 16.9%.

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Fast forward just five trading sessions through yesterday, 7/16/24, and the year-to-date return of the Russell 2000 is 11.7%, and the year-to-date return of the S&P 500 is 18.8%. Yes, you are reading that correctly, the Russell 2000 gained 11.6% in five days. While it’s unknown where large cap and small cap will end the year, my guess is there will be a lot of interest in small cap stocks given their sudden relevance.

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While shocking, these bursts are nothing new. In fact, they should be expected every so often over a long-term investment time horizon. Consider the chart below from DFA, which outlines the growth of $1,000 invested in the S&P 500 from 1990 through 2023. If you were invested for the whole period, your annualized return was 10.21%. If you missed the best 25 single days, your return was about half, at 5.30%. In short, that means that .002% of the days over a 34-year period accounted for about half of the returns in the S&P 500.

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Picking investments based on short-term returns may hurt long-term investment performance. Doing so is usually driven by greed or fear. At DCA, we implement a low-cost, diversified, tax-efficient investment approach that our clients can stick with for the long-term.