Trying to time the market, by moving into cash during periods of high volatility, can greatly diminish long-term returns

In the past, investors who shifted into cash during volatile markets would have greatly reduced their long-term gains. The performance of US stocks since 1990 demonstrates that:

• Investors who moved into cash when the Chicago Board Options Exchange Volatility Index (VIX) was above its historical average and then moved back into stocks when the VIX came down below that average, would have reduced their returns since 1990 by nearly 80%.

• Even trying to be “disciplined” with this turmoil-avoiding strategy—and moving into cash only when the VIX was in the top 5% of its historical range—wouldn’t fare much better. That approach would still cut nearly in half the returns that could have been realised.

• The most rewarding strategy was to stay fully invested and not react to the volatility.