With recently elevated volatility levels some investors are afraid to hold overnight as it’s much harder or not possible to make trades. While it seems intuitive to take risk off the table when there’s not much you can do if things head south, it takes you out of the market when most of the returns are harnessed. When comparing just holding the SPDR S&P 500 ETF Trust SPY overnight versus just intraday, the overnight returns outpace the intraday returns by a large margin.
Since 2000, only holding overnight would return 129.15% while only holding during the day would return -1.89%. Although selling at the close protects you from overnight moves to the downside, over time it will materially eat away at your returns. If you were to just buy and hold over the period, SPY returned 122.62%. Taking into account the market’s increased volatility over the past few months, closing positions at the end of the day or week is not a quality method for reducing risk, especially over time. There are other ways to reduce your clients’ risk profile like increasing your static allocation to cash or diversifying into less correlated assets that can help you and your clients sleep better without having to miss the returns produced overnight.
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