The Cost of Missing Best Days in Market: Why and How to Stay Invested

Missing best days in markets!

Missing best days in markets can cost an investor a lot. Many would wonder what and how?

Disadvantages of missing best days in markets:

• You wait more to buy at your price which may not come and thus you take a hit on your investment strategy.
• You get to buy at higher price which again directly takes hit on your return.
• You feel left out of the party and this adversely affects your psychology and might create mental heuristics and biases, which are biggest destroyers of right and smart investing practices.
• Stocks Tend to Move, and Move Quickly The main factor working against market timing is that stock gains often come in quick, intense bursts. Miss enough of them and you lose all of the long-term advantages of owning stocks
• Obviously, the clear thing you are missing out by missing out best days in market is the return. As you have already seen how wealth and return can variate by missing 10-20 or such few exceptional days in markets.

 Read more on the disadvantages in terms of loss of returns, under 'facts and research' further.

Thus, the message is clear, you absolutely need to remain invested in markets at all those best days!

But how to do it? Is there a way out?

Good. There is not any! You can say that all other rules of market are independent of this rule.

The stock prices do not rise and fall symmetrically or linearly.

There are circuit limits for stocks to rise and fall in intraday. But there are no stipulated date, time, or days when they should and shouldn’t!

A stock might just sit tight all long 363 days and not move a single percentage point and might in fact fall. But it can still give 50% annual return by rising 25% on the remaining two days of the year!

Are you getting it?

Thus the main rational and moot point behind this argument and principle-if you want to call is-stocks can rise any percent at any point. You cannot time it. Or you can not apportion/proportion them. And this is a reality every one should accept. Market and stocks can be timed, but not in a sense for investors, it can be done for traders. So for investors, timing is too far. They invest for, say 1 year at least. Suppose a trader want to time market or some stock for one year, it is not possible. When forecasting for traders, the longer the duration, the less efficient the forecast. While the shorter the duration the better the forecast may be. Same goes with investors. The longer the duration of forecast, probably the better the forecast. And vice-versa. But here as well too much longer, and too much shorter forecast would have reduced reliability. A forecast of few hours/a day and a forecast of after more than 5-10 yrs can be less effective. There are extinction points.

Cutting theoretical-academic-type texts there; I would like to reiterate the main message that you need to stay invested, to reap full benefit of markets. Because markets/stocks do not rise proportionately. While in an in-house study we conducted, we have seen interestingly that the declining stocks, decline proportionately. They have better identifiable patterns that can offer an investor an exit way, if one identifies it to be a losing/declining stock. We will discuss more on it later.

OUR ATTITUDE;

This also goes with our attitude towards our investment based service customers. Many of them tell us why do not we make them exit when we most of the time know about the correction in the market? We simple explained them all the ‘rule of missing best days’. We told them, yes we do most of the time forecast when markets are weak and correct, but those may not be ‘weak’ and ‘correcting’ days for our portfolio stocks. In fact many of our stocks continue rising in consolidating, weak and in correcting market as well.

Another thing, we might not know some times the correction is over or a rally picks up swiftly. Anything can happen. When you are not able to make odds in your favour, do not use that research.

LET’S GO INTO SOME FIGURES AND RESEARCHES:

• One mutual fund research states that missing best 10 days can reduce wealth creation by 65%.

• Another study shows that 3/4^th of gain of S&P 500 in the year 2004 came in only 14 days.
• Another study says, in 10 years ending June 30, 2006, missing the best 10 days of the S&P 500 (that’s 10 out of 2,517 total trading days) would have reduced your annual return from 8.3% to 3.3%.

• Another study gives example of a person investing on june 30 1994 till june 30 2004. If suppose he has invested $10000 then it would have grown into $3126 at an annual total return of 12.07%.

However, suppose the person decided to get out of the market during volatile periods in those ten-years, and as a result he missed the market’s ten best single-day performances. If that were the case, his 12.07% return would have fallen to 6.89%. If Bill missed the market’s best 20 days, his return would have dropped to 2.98%. Adding in transaction costs would have reduced his return even further.

PERIOD OF INVESTMENT	AVG.ANN.TOTAL RETURN (%)	GROWTH OF $10000 INVESTED
Fully remained invested	12.07	$31260
Missed the best 10 days	6.89	19476
Missed the best 20 days	2.98	13414
Missed the best 30 days	-0.39	9621
Missed the best 40 days	-3.19	7233
Missed the best 60 days	-7.90	4390

Source-Factset Research Systems, AIM Distributors Inc.

• Another study named-Black Swans and Market Timing: How Not To Generate Alpha, by Javier Estrada, International Graduate School of Management, Barcelona, Spain presents its finding as below:

The period in this study encompasses more than 100 years of daily data on the Dow Jones Industrial Average from December 31, 1899 through December 31, 2006. In total the study examines 29,190 trading days. A $100 investment at the beginning of 1900 turned
into $25,746 by the end 2006, and delivered a mean annual compound return of 5.3%.

Here are the important conclusions or the study,
1) Missing the best 10 days reduced the terminal wealth by 65% to $9,008, and the mean annual compound return one percentage point to 4.3%.
2) Missing the best 20 days reduced the terminal wealth by 83.2% to $4,313, and the mean annual compound return to 3.6%.
3) Missing the best 100 days reduced the terminal wealth by 99.7% to just $83 ($17 less than the initial capital invested), and reduced the mean annual compound return to −0.2%.

• The below chart is based on illustration of return on a lumpsum investment of $10000 invested in the S&P 500 index from January 1, 1979 to December 31 2008.

Period of investment	Avg.annual total return	Growth of $10000
Remained fully invested	11%	$228922.97
Missing 5 best days	9.07%	135256.89
Missing 10 best days	7.50%	87549.55
Missing 15 best days	6.18%	60434.04
Missing 20 best days	4.91%	42121.77

Source-GE Asset Management

The moral is you need to BE INVESTED at the best days. And you need to invest at other days, or at bad days.

SOME OPPOSITION  VIEWS:

One of my friend who is also a fund manager at PMS desk of a big brokerage house in Mumbai, told me that all talk about lost gains/wealth of missing best days, but one should talk about the wealth/gain lost by ‘not missing’ the worst days.

On response, I presented two things. One, I already mentioned that the declines in the stocks have been more gradual and patterned, than the rise. Simply, stating, you might see stocks rising 10-20% in a day, or even more. You also see them doing so constantly for more than one days. But how many of you recollect stock falling heavily in a day? Or doing so day-by-day? More lesser than often.

One thing also to be identified is that when I say of all these, I speak of both the indices and for the individual stock perspective as well. While most have tried and written mainly keeping in mind the indices. Researches and proofs of empirical data as well have been so far mainly presented for indices and not individual or a sample of stocks. It is indeed difficult.

So while there are critics and skeptics of this ‘missing best days’ prophecy, I would continue to believe in it for the contended rationales.

Another contrarian set of people argue that it is more important to avoid/miss larger losses (days of biggest losses) than to pursue larger gains. Some of them have tried to show how missing worst days benefited and so on. Some of them even went further and presented what would have happened if one ‘missed both best and worst days’!

Here, we stop and think. Why at all think about least of the least practicable, probable and possible event? We are then going far from the utility of the intellectual exercise we are doing. We just do not want to play game with market data for our intellectual fun? I mean that how can one avoid best and worst days? This is damn perfect timing! In fact this whole ‘missing … days’ applies to/to give a lesson to, those who pull out of market regularly on impulses, or do not stay invested, and those who are not at all invested.

The point is that one should not be overdoing to prove this contradictorily.

Yes, ‘avoiding worst days’ can be a good subject of study. But here too, I would like to put emphasizely   that we ‘play to win; and not ‘not to lose’. The first assumption is that stock markets are risky (forget for a while how govt. bonds, real estate, commodities and such other non-equity stuff have as well destroyed wealth and given negative returns!). We all invest to get a return and not to keep the capital safe. Keeping the capital safe is among one of the prime objective of an investor, but not the main. The main objective is to generate returns. And more often good, higher than bond/bank fd rates. This cuts the ‘avoiding worst days’ argument right away. Moreover, don’t you think that avoiding ‘worst days’ argument is also one of the very promoted, advised fundamental principle of prudent investing. That is buying when it is bad!. Yes, buying when it is distressed and bear is advised and agreed by most value and lefendary investors. And the argument of so-called benefits of ‘avoiding worst days’ contradicts it.

SOME MORE THOUGHTS/POINTS-

The biggest days often come at the earlier days of recovery, and the last stage of bubble.

There is also an issue of close proximity of worst and best days. And how to interpret this behavior.

We will come up with more thoughts on these soon.

Now you know that you need to STAY INVESTED in the markets at those best days. But in which stock would you invest? 

This question prompts us to suggest you our unique ‘Ready-to-invest’ STANDARD Portfolios.

Please Click Here for details.