Arguing about the Market’s Best Days

In the Big Picture post on this chart earlier this week,  Barry Ritholtz is drawn to that spiking yellow line.  “If you manage to avoid the 10 Worst Days, your portfolio  more than doubles the Buy & Hold performance,” he writes. $100,000 invested in the S&P 500 ETF  in February 1993, would have grown to a total of $692,693.00. Buy and hold gets you to $324,330.15.

Figure out a way to miss the losing periods, Ritholtz notes, and you’re literally golden.

But to me, it’s just as interesting that the 10 best days almost exactly outweigh the 10 worst days.  Other examinations that look at the best and worst months have found the exact same thing.

“The lesson I take from this:,” Ritholtz writes, “It is great if you can avoid the major down days, but only if you can do so in a way that does not have you missing the major up days.”

Which honestly, sounds pretty difficult to do, no?

Even harder than you might imagine. In the comment session that follows the post, the discussion highlights research that’s found those good and bad days are often quite closely clustered together. So you’d have to be trading in and out with great alacrity to stand any chance of getting the good without the bad.

Michael A. Gayed a CFA at Pension Partners who sent Ritholtz the original chart says it’s meant to explain why buy and hold works. And that the reason is: you have to be in the market on its 10 best days whenever they may come.

5 thoughts on “Arguing about the Market’s Best Days

  1. Michael A. Gayed, CFA

    Glad to see that my post is making the rounds online. I took the analysis further by looking at extreme days in the Dow Jones Industrial Average since 1923. I put a post up about my findings on my SeekingAlpha.com Instablog.

  2. Michael A. Gayed, CFA

    I think there is validity in the idea of timing broad cycles to lower volatility. So in other words, if the decision is to be in stocks or not, history shows you’re better off being in cash in bear markets than actually shorting into it. This is primarily due to the extreme days which greatly impact the ability to perform when shorting. Perhaps the more optimal decision is that rather than “time” the stock market, it makes more sense to “rotate” into different asset classes (switching into bonds for example). Doing this allows for the potential for gains while not having the same extreme days phenomenon because of the nature of fixed income price movement being different. Keep in mind that the extreme days (both up and down) occur in periods of heightened fear. This should come as no surprise to people who study behavioral finance: people feel the pain of loss more than the joy of gain for the same dollar amount. The fear of loss causes extremes to happen more often.

  3. caesark

    You state “the 10 best days almost exactly outweigh the 10 worst days”; however the numbers do not appear to support this. Looking at the chart, it appears that by eliminating the 10 worst days, the ending value is approx $700. By eliminating the 10 worst days, the ending value is approx $160. Buy and hold ends at approx $320. So by eliminating the 10 worst days, there is a reward of $380, while the elimination of the 10 best days only results in a penalty of $160?
    Further, if one were to invest $50 in a portfolio that missed the 10 worst days, according to the chart it should result in an ending value of $350 (half of the $700). If another 50 were invested in a portfolio that missed the 10 best days, the ending value should be $80 (half of the $160). The combined result would be $430 ($350 + $80). The chart shows the result to be $320?

  4. Nanette Byrnes Post author

    Thanks for your note Caesark.
    What I meant when asserting that the best and worst almost exactly outweigh each other is how closely the “buy and hold” blue line and the “10 best and worst days removed” green line track one another. But since you also question why the green line ends at around $320,000, I went back to Michael Gayed to see if he might be able to identify why there could be a difference between your calculation of a combined result of $430,000 and the charted $320,000. He suggests one of two things may be the cause:
    1. Either a rounding error is occurring (a butterfly effect in the compounding), or
    2. summing the two truly does not get you the same effect as if you had put the money in buy and hold. That could have to do with when the extreme up and extreme down days occur, and the compounding effect afterward.
    I hope that’s helpful and that others will weigh in too if they have thoughts on your query.

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