The Myth of Ten Best Days
About once a year, I have to address the issue of chasing the "10 Best Days" of the year. The financial media regurgitates this same analysis whenever there is a market correction. "If an investor were to simply miss the 10 best days in the market, they would have shed over 50% of their end portfolio value. However, as Paul Harvey used to quip, "In a moment…the rest of the story." Here is the problem with the analysis. What about the losing days? While those doing the analysis do mention the losing days, they dismiss the impact. Here is the "rest of the story" from Statista. "Over the last 20 years, seven of the 10 best days happened when the market was in bear market territory. Adding to this, many of the best days take place shortly after the worst days." The statement is correct, as the S&P 500's largest percentage gain days tend to occur in clusters during the worst of times for investors. As a strategy, buy and hold works great in a long-term rising bull market. However, "buy and hold" generally fails as a strategy during a bear market for a straightforward reason: Psychology. This is why investors should follow an investment discipline or strategy that mitigates volatility to avoid being put into a situation where "panic selling" becomes an issue. Let me be clear. An investment discipline does not guarantee your portfolio against losses if the market declines. However, a solid investment discipline will work to minimize the damage to a recoverable state. So, what about missing the "10-Worst Days?" How important is this? Over an investing period of about 40 years, missing the "10 Best Days" would cost you about 50% of your capital gains. But successfully avoiding the "10-Worst Days" would have led to 250% gains over "buy and hold." Avoiding significant drawdowns in the market is critical to long-term investment success. Obviously, if you are not spending the bulk of your time making up previous losses, more time is spent compounding invested dollars towards long-term goals. The finance industry doesn't tell you the other half of the story because it is not profitable for them. The finance industry makes money when you are invested, not in cash. "I do not strictly endorse 'market timing,' which is specifically being 'all-in' or 'all-out' of the market at any given time. The problem with market timing is consistency." Being all in or out of the market will eventually put you on the wrong side of the "trade." Such then leads to a host of other problems. Furthermore, ask yourself why no "great investors" in history employed "buy and hold" as an investment strategy. Even the great Warren Buffett occasionally sells investments. True investors will buy when they see value and sell when value no longer exists. Will such a method always be right? Absolutely not. However, can such a method reduce the risk of damaging capital losses? Absolutely. Hold the cash raised from these activities until the next buying opportunity occurs. Use some measures, fundamental or technical, to reduce portfolio risk by taking profits as prices/valuations rise, or vice versa. The long-term results of avoiding periods of severe capital loss will outweigh missed short-term gains. Minor adjustments can have a significant impact over the long run. There is little point in trying to catch each twist and turn of the market. But that also doesn't mean you must be passive and let it wash all over you. It may not be possible to "time" the market, but it is possible to reach intelligent conclusions about whether the market offers good value for investors.
