A catchy statistic thrown around by the buy and hold crowd is “if you miss the 10 best days in the market…” usually followed by some statistic of horrendous, under performing returns. Irrelevant of the time frame, or number of best days (outliers) missed the buy and hold crowd is right here. Research has found it true that if you miss the best days, you miss out on returns by a long show.
A paper by Mebane Faber took a look at the best and worst 1% and .01% of days in the SP 500 from 1928 through 2010. The best/worst 1% of days have +/- return of 4% +/- , and are fairly regular happening a few times per year. The best and worst 0.1%, total 44 days present some true outliers, all with swings of +8% or -8%. These are days when black swans occurred.
Faber found that if you missed the best 1% of all days in the SP 500 from 1928-2010, you would have had a real return of -7.08% (yes negative) per annum vs a 4.86% real return if you had just done by and hold. Buy and hold disciples eat these kinds of statistics up.
Looking at missing the best days only tells half the story though. What if you missed the ugliest of days? Had you been sharp enough to miss the worst 1% of days from 1928 – 2010 you would have a smoking return of 19.09% a year.
The Best & The Worst
Let’s combine these 2 halves. If you missed best 1% of days, and the worst 1% of days you’d have a return of 5.48% — beating the buy and hold. This holds up across multiple markets. In 15 international equity markets, over various periods of not less than 34 years the findings are consistent. In all cases missing the best 1% of days and worst 1% of days would’ve produced high returns than buy and hold.
Of course missing only, the best and worst days isn’t going happy unless you have a crystal ball. Fortunately, we do have technical analysis that can tell us when the best and worst days are likely to happen. Think about it logically first though. The best and worst days usually happen close to each other. The market has a sudden drop, then it springs up. On Monday October 19th 1987, Black Monday, the market dropped more than 20% in one dark day. Then on the succeeding Tuesday it rebounded 9.1%, making 2 consecutive days an outlier falling in the 0.1% of all days. Wednesday the 21st made the charts as a 1% day with a 5%+ gain.
2008 Q3 – 2009 is a time period making home to many outliers as well. 9/28/2008 – 10/29/2008 had 4 outlier days having more than an 8% leaps or falls. When big swings up and down occur in a short period of time we have volatility, and volatility tends to cluster.
Below The Simple Moving Average
Faber takes a look at this and finds that annualized is 67.8% higher (24.03% vs 14.32%) when the price is below the 200 day Simple Moving Average (200 SMA). In other words, volatility is much higher when the market is in a downward trend. The number of best and worst days also co-insides with that as 60-80% of the best and worst days occurring <200 SMA.
We can’t say for certain when the best and worst days will occur but we know they are about 70% likely to occur to when the SP 500 is below its 200 SMA. We also know that if you miss the 10 best days as a result of following the 200 SMA, you’re likely to miss the worse days so you won’t get the dreadful returns that are said to occur if you miss the ’10 best days’.
What I’m Reading: