Invessential

Buy at Open or Buy at Close: What History Tells Us

Vineel Bhat   |   09/16/22

Overview

Investors purchase stocks and index funds during different times of the day. For individual investors, the time of purchase during a day will often depend on personal convenience: timezone differences and working hours can make trades at some times of the day highly inconvenient. But aggregated, most investors end up buying and selling equities close to the open and close times of the US stock market (typically there is an uptick in volume during these “power hour(s)”).

For long-term investors, does either buying at open or buying at close outperform the other over a long period of time? In today’s article, we will dive into this question, which may be insightful for a subset of individual investors who concentrate their buying during these times of the day. The answer may also be a deciding factor for investors who are considering upgrading to unlock the “afternoon trading window” which brokerages like M1 Finance include as part of a subscription.

Historical Performance of Strategies

To assess the relative performance of buying at open versus buying at close over a long period of time, we test the strategies on the S&P 500 index, running 10,000 computer simulations representing random 20 year periods from 1928 (the first year when open, high, low, close data is available on the S&P 500) to 2022.

94.7% of the time, buying into the S&P 500 at open on a daily basis outperforms buying into the S&P 500 at close over a 20 year time period. However, the average outperformance of buying at open during these time periods is minuscule at just 0.90%, which translates to 0.04% on a compounded annual growth rate (CAGR) basis. In the 5.3% of the time when buying into the S&P 500 at close outperforms buying at open, the average outperformance of the strategy is substantially higher at 3.18%, translating to a 0.16% 20 year CAGR.

strat_perf

Source: Invessential.com

Weighted by average outperformance, buying at open as a strategy still comes on top. From this, it can be reasonably concluded that there is a slight edge to buying at open versus buying at close over a long period of time.

Diving Deeper

When does one strategy outperform the other? Take a look at the distribution of starting dates of 20 year periods (total of 10,000 simulated) when each strategy outperformed the other:

Source: Invessential.com

These plots show a clear trend. Buying at close only outperforms during 20 year periods which span a long-drawn bear or flat market. This can be seen in the starting years of these periods being primarily before the start of the great depression (1928, 1929, 1930, 1931) and the mid-50s which preceded a nearly two decade long flat market. Conversely, buying at open outperforms a consistent number of times in all other periods.

The average outperformance in periods when each strategy outperformed the other provides another interesting insight:

Source: Invessential.com

Buying at open outperforms the greatest during 20 year periods which precede a strong bull run (great depression lows, lows before the bull run of the 80s). Conversely, buying at close outperforms the greatest during periods which precede a massive bear market: outperformance was relatively large in 20 year periods starting right before the great depression, but meager in 20 year periods preceding a more flat market (mid 50s).

Conclusion

Buying into the S&P 500 index at open daily outperforms buying at close over a 20 year period 94.7% of the time. The average outperformance of a 0.04% CAGR annually (0.90% over 20 years), though, is probably not a large enough difference to justify sacrificing convenience for (if buying at open is inconvenient for reasons such as the constraint of work schedules). In fact, the most traded S&P 500 ETF by volume, the SPDR S&P 500 ETF (SPY), erodes your annual returns by 0.09% through its expense ratio, and this rarely sways individual investors. Ultimately, the time of day you purchase equities will not make a noticeable difference on your net worth over time. 

However, if you are able to make the switch to buying at open easily, it may be worth the small advantage. For those who are considering upgrading to a paid subscription to unlock an afternoon trading window on brokers such as M1 Finance, these findings show that such a feature alone is not worth the buck for long-term oriented passive investors.

Cheers, and happy investing!

Code

Any code related to my posts (analysis or plotting) is available on GitHub here. Files are named based on the date of the post (e.g., 09/16/2022 for this article). For questions, feel free to contact me at invessentialmain[at]gmail[dot]com.

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Disclaimer: Opinions not advice! I am not a registered financial advisor. All views and recommendations expressed in this article are solely my opinions and should not be considered as financial advice.