As featured in the Herald Sun – Friday 9th December 2016.
By Gary Stone – Author of Blueprint to Wealth: Financial Freedom in 15 Minutes a Week & the Founder of Share Wealth Systems
I’m an advocate of “time in the market” and in “timing the market.” Both work, and I use both. Which to use depends on your investing goals and how you would like to spend your time. However, the financial establishment wants you to believe that the market cannot be timed and that the only way to invest is to stay in the market all the time; and invest with them. To convince you they propagate marketing misinformation.
A scenario they often broadcast is that if an investor tries to time the market and misses just the ten best return days in a ten-year period, all the potential accumulated gains over the period will be forfeited and result in a small overall loss. It gets worse if the twenty, thirty and forty best days are missed which result is fairly large ten-year losses. Theoretically, this is true. Practically, it is deceptive misinformation.
Busting this myth only needs the open-minded investor to complete the analysis and ask what will happen if the ten WORST days are missed, or if BOTH the ten best and ten worst days are missed.
These paint a very different picture. Research shows that, over a ten-year period, missing the worst days has a bigger positive effect than the negative effect of missing the equivalent number of best days. Missing the equivalent number of BOTH the best and worst days’ in a ten-year period results in a far better outcome than staying in the market for all days. This shows that there is definitely potential benefit from timing the market to miss the worst days.
The next open-minded question to ask is WHEN do the best and worst return days occur? Simple analysis shows that they occur within close proximity to each other! This is profound because it means that missing the best days is almost impossible to achieve without also missing the worst days. Which makes the notion of ONLY missing the best days’ deceptive misinformation.
For example, in a ten-year period which includes the 2008 bear market, the two best single day gains of 11.58% and 10.79% for the S&P500 occurred in a month when the S&P500 fell 22.48%! The worst performing month for the ten-year period. The 1st, 3rd, 4th, 8th and 9th worst days of the entire ten years also occurred in the same month, October 2008.
The same occurred in October 1987. The three best days and the 1st, 3rd, 8th and 9th worst days over ten years all occurred in that -20.47% month!
Perhaps the aim should be to miss the best days! This will ensure that the worst days and months are also missed thereby achieving a far better overall investing outcome – the exact opposite to the financial establishment’s misinformation. A paradox!
Sure, trying to time the market day-by-day is an extremely tough gig. But timing on a longer-term basis to avoid the worst months of a large bear market can work very well…