DRAFT
Summary
Tired of hearing about “missing the best 10 days” in the market? It’s time for a reality check. This post dives into the other side of the story – the power of avoiding the worst days, and why a nuanced approach to market timing can be a game-changer for your portfolio. Don’t let incomplete advice hold you back from achieving your financial goals. Click to discover a more complete perspective on investing.
The Power of Avoiding the Worst: Discover how missing the market’s worst days can significantly boost your returns.
The Emotional Toll of Losses: Explore why losses matter more than gains, both financially and psychologically.
The Importance of Nuance: Learn why a more nuanced approach to market timing can be beneficial.
Our Strategy: Get a glimpse into how we approach market timing to help our clients navigate volatility.
Your Financial Future: Take control of your investments by understanding the full picture of market timing.
You’ve heard it before
The buy-and-hold strategy, often presented as the cornerstone of long-term investing, typically involves tailoring a portfolio to a client’s risk tolerance and assuring them it’s designed to weather market storms. Clients are told to stay the course, with the promise that the market will rebound and brighter days are ahead. To reinforce this, advisors often highlight the detrimental impact of missing the market’s ten best days, emphasizing the risks of trying to time the market.
But is this the whole story? While the buy-and-hold philosophy has its merits, it often overlooks a crucial aspect: the impact of the market’s worst days. Could avoiding these periods of significant decline be just as crucial for long-term financial success?
In this post, we challenge the conventional wisdom of solely focusing on “missing the best days.” We’ll explore the often underestimated power of avoiding the worst days and delve into how a more nuanced understanding of market timing could reshape your investment strategy.
Prepare to question the traditional buy-and-hold narrative and discover a fresh perspective on navigating market volatility.
The Data
We will start by looking at the data that is typically used to support the “missing the best days” argument. This data is often presented as a cautionary tale, warning investors about the potential consequences of trying to time the market. However, we will take a closer look at this data and consider the other side of the story – the impact of missing the market’s worst days.
To examine the impact of missing the market’s best days, we gathered historical daily price data for the S&P 500 index from 2000 to the present. We calculated the daily log returns to assess the percentage change in value each day. Then, we identified the top-performing days within this timeframe and simulated scenarios where an investor missed a varying number of these peak days. By filtering out returns for these specific dates, we created multiple hypothetical portfolios, each representing a scenario where 1, 2, 3, 5, 10, or 20 of the best days were missed.
As you can see based on Figure 1 above, missing the market’s best days can have a significant impact on your portfolio’s performance. The argument sometimes even shows how the best days in the market are during drawdowns or periods of losses of a portfolio. Without being presented all the data, this would be a fairly good argument on why you would want to buy and hold and not try to time the market.
The argument is made that you are better off being fully invested in the market and not trying to time the market. Often showing a chart of cummlative returns for the S&P 500 index and how missing the best days can have a significant impact on your portfolio’s performance.
The Other Side of the Coin
We are going to add a spin on this question, by looking at the scenerio if you missed the worst days in the market. We will use the same data and the same methodology as before, but this time we will look at the worst days in the market.
However, this data only tells part of the story. To gain a more complete understanding of market timing, we need to consider the other side of the coin – the impact of avoiding the market’s worst days.