NOREEN RASBACH

nrasbach@globeandmail.com

November 15, 2008

It's easy to get disheartened by these volatile markets, isn't it?

On Wednesday, when the S&P/TSX closed below 9,000, I stopped and questioned - again - my strategy of staying in. It was so hard to watch yet another plunge. Even when I know I'm supposed to feel glee - like seeing that Apple, a stock I sold six months ago for $189.50 (U.S.), is now hovering at less than $100 - I still feel unsettled.

But so far, I have not been shaken from my resolve to keep invested in equities, even if my emotions have been stirred.

One of the things helping is a study I've embraced by H. Nejat Seyhun, a professor at the University of Michigan's Ross School of Business. It was given a mention in a New York Times column, and I was instantly intrigued. Dr. Seyhun, who studied stock market returns between 1926 and 2004, found that a very small number of days accounted for a large percentage of market gains and losses.

In fact, in the 42 years from January, 1963, to December, 2004, just under 1 per cent of the trading days accounted for 96 per cent of the market gains. (He used for the study, commissioned by the U.S. firm Towneley Capital Management, a capitalization-weighted composite of stocks traded on the New York Stock Exchange, American Stock Exchange and the Nasdaq Stock Market.)

Put another way, if you invested $1 in 1963 and kept it there for 42 years, you would have gained $73.99 on the investment. If you exclude the 10 best trading days from that period, the gain would have been only $43.83.

Dr. Seyhun's study looks at all kinds of variations - missing the 10, 40 or 90 best and worst days - but, essentially, the conclusion is clear: Stock market extremes are crucial to portfolio performance, and, as he told me this week in an interview, "we don't have any idea when those are going to occur."

So much for trying to time the market.

A more recent study by Javier Estrada, a professor of finance at Barcelona's IESE Business School, produced similar results. The study, which was published in this fall's The Journal of Investing, looked at 15 different equity markets, including Canada's S&P/TSX composite index, for 31 to 79 years, depending on the index. On average, missing the best 10 days resulted in portfolios that were 50.8 per cent less valuable than a passive investment. (Dr. Estrada was travelling this week and could not be reached for comment.)

What I really love about these two studies is they disabuse you of the notion that market increases and declines are slow and steady and rational, that when a turnaround happens, there will be plenty of time for everyone to get on board and make some money.

Dr. Seyhun agrees that market turnarounds can be quick and dramatic. "What most people do is when the market goes up, they want to get in. When the market goes down, they want to get out. And when fluctuations are large, that turns out to be a terrible strategy."

I also like his approach to investors who have not fled. Dr. Seyhun says that during turbulent times like these, "part of the market discount is to provide additional rewards for staying in the market when a lot of other people just don't have the guts to do so."

Not only does it make me feel like I may make some money some day, I feel almost heroic.

Let's face it, if I were really able to time the market, I would have fled on June 19, the day after the S&P/TSX hit its record high of 15,073. I'm five months and about 6,000 points too late. The very least I can do now is be there when it finally bounces back.

More importantly, though, I have the luxury of time and am able to wait it out. Dr. Seyhun says part of the reason investors make mistakes is "they're watching their money on a day-to-day basis instead of saying, 'Look, I don't need the money for five or seven years, all I care about is what's going to happen seven years from now.' And in that case, there's no reason to panic."

I don't know about five or seven years; my short term is two or three years. And I know I'll continue to watch every day - and worry. That's just my nature. But so far, I've managed to stay the course and this week's studies make me more resolved to do so.