The Best Days and the Worst Days

Way back in the 1990s, when the “buy and hold” crowd was beginning to accumulate evidence that the most successful investors effectively buy stocks and head to the beach, the idea of “if you missed the 10 best days” in the market started gaining traction in marketing materials.  What it amounts to is that, depending on the time period, if you try and time the market and miss the 10 best days, your returns are half of what they would have been had you just stuck with a “buy and hold” strategy. Here is one recent example a quick search yielded:

In this example, done by Fidelity, it is apparent that if an investor put $10,000 in the market in 1980 (over 40 years ago!) and just indexed in the S&P 500 they would have over $700k, as compared to an investor who missed the 10 best days having roughly half that amount at $341k.  Seems pretty compelling, right?

Here’s another example from Putnam Investments:

Again, even though a different time period, a 15 year stretch from the end of 2004 to the end of 2019, roughly the same effect of missing the 10 best days yield half the return as buy and hold for the investor.

Well first of all, as my old colleague at Zweig Mutual funds would say, “investor behavior and investment behavior are very different”.  In other words, intellectually we can accept the fact we need to “buy and hold”, but emotionally it is hard to hold on when the market is so volatile.  In the 40-year example from Fidelity above, that $700k was achieved despite many brutal bear markets, including the crash of ‘87, the tech wreck in 2000-01, the financial meltdown of 2008-09, and several other disastrous markets.  Do you realistically think most investors held on during those tumultuous times to realize those theoretical gains? It also begs the question, what if an investor missed the ten best and the ten worst days?

Interestingly, it’s harder to find data on that concept, but another online search came up with an interesting article and graph from Michael Batnick of the Irrelevant Investor which talks about this very concept of missing both good and bad days.  Link to the article is here:

Below is the graph he used to show the power of missing good and bad days:

What I found particularly interesting is that by missing the best and the worst days not only does the investor get better returns, but they also endure much less volatility.  Granted, there are tax implications in non-qualified money and trading costs, but emotionally it is much easier to invest for the long-run if the volatility of your portfolio is controlled.  However, how can an investor even come close to this mythical missing both best and worst? Well, as it turns out, the best and worst days tend to cluster together in periods of extreme volatility.  

The article in the Irrelevant Investor goes on to point out that between 1997 and 2019, 46 of the 50 best and worst days in the market all happened when the S&P 500 was below its 200-day moving average.  In lay terms, the most volatile periods for stocks are when we are in a declining market. Seems pretty relevant right now, doesn’t it?

If you are stunned, like I am, by the extreme two-way volatility of this market right now, there is the reason.  Below is a chart from my colleague Dan Russo from his morning note on April 2nd, which shows the S&P and the paltry number of stocks that remain above their own 200-day moving average:

We are currently experiencing multiple “best and worst days” on a daily basis.  When the market is up over 10% in ONE DAY, traditionally a good YEAR for stocks, of course if you “missed” that day your overall returns would be much worse over the long-run.  But I personally also don’t want to own stocks on the down 6%, 7%, 8%, etc. brutal sell-offs we are experiencing.  

So what’s the take away?  When the market is below the 200-day moving average, it’s better to either sit on the sidelines or be very careful about what you own.  

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