Mike Gayed of Pension Partners shares this chart with us:
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SPX ETF 10 Best/Worst Days Removed
click for larger chart
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There are a few interesting observations about this data set:
• The 10 best days account for 50% of the buy and hold performance (roughly 0.2% of the days from 1993 to August 2010).
• Classic “Buy & Hold” nets $324,330.15
• Missing the 10 Best Days gives up more than 50% of the Buy & Hold performance: $156,354.12
• If you manage to avoid the 10 Worst Days, your portfolio more than doubles the Buy & Hold performance: $692,693.90
The lesson I take from this: 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. If you manage to avoid all of the Worst days, but miss all of the Best days too, then your portfolio performance will be is nearly the same as straight Buy & Hold (but with additional taxes and commissions paid).
Now the reality is no one will consistently miss all the worst days — I’m the first guy to admit our 100% Cash call the day before the flash crash was dumb luck — but you can avoid being long for most of a secular bear market. If you can miss the longer downtrends, you end uop way ahead. Not drops that last days or weeks, but the secular months and quarters in the red.
That might be more challenging approach to chart — but its worth exploring . . .
Category: Investing, Markets, Technical Analysis
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
I think the word “nets” in “Classic “Buy & Hold” nets $324,330.15″ is misused by the source.
Chart starts 100k and ends near 330k. Net would be 224k, right?
Kinda surprised to see this here. This “missing best day/worst day” stuff is pretty much garbage.
Basically all the best/worst days occur during bear markets (high volatility, market below 200 DMA). Few if any of the “best” days happen when the market is trending smoothly up in a non-volatile manner.
This ground was covered long ago here:
http://www.mebanefaber.com/2008/03/27/noise-the-10-best-days/
The best days in the market are nothing more than interesting statistical anomalies. The argument that missing the best days would reduce the final return of a buy-and-hold investment is true, but it also provides no information regarding the question of whether or not one can time the market. A simple moving average cross-over system will cause you to miss nearly every one of the best days and you should be happy to watch them pass by, because you’ll also be missing the more-than-offsetting declines those “best” days are invariably tied to.
http://www.mebanefaber.com/2008/03/29/more-on-volatility-clustering/
Since 1951, the market (S&P500) has been above the 200 day moving average roughly 70% of the time. Roughly 70% of the best and worst days (as measured by 10 and 100 best/worst days) occurred when the market was below the 200 day moving average. The more interesting stat?
The market is roughly 50% more volatile when below the 200d sma. I touched on this topic in my paper where using the simple timing model works because it basically changes the distribution of returns. You miss the worst days, but also miss the best days.
This best day/worst day junk is a great example of how quantitative evidence can be presented in a manner that it is completely misleading.
The Mebane Faber piece is excellent.
I love “interesting statistical anomalies;” And who does not appreciate “Volatility Clustering ?”
But I believe the conclusion stands — if you are going to engage in market timing, and you manage to miss the big down days, it is important not to miss the big up days
Also from the link:
“A closer look reveals that all may not be as it first appears, that this may be a misleading characterization of market history. If so, “Don’t Miss the Ten Best” could be construed as an ethical violation of both the CFP Board’s Code of Ethics and Professional Responsibility (Code of Ethics), and the Securities and Exchange Commission’s Rule 206(4)-1 under the Investment Advisers Act of 1940.”
Most of those crazy up or down days were at the end of 2008. Jumping in and out at the right time in those months would be impossible. But could one realistically have seen the fall coming and gotten all cash in September 08 and then also seen the the turn around to get all back into stocks in March 09. It is probably more realistic to get that sort of a timing strategy to work. But it is not for amateurs. You have to be able to fight the natural tendency to be optimistic when things are way up and pessimistic when they are way down.
Mike C is dead-on. The take-away is that volatility clusters, such that big up days (and weeks, and months) occur directly adjacent to big down days (and weeks, and months). These occur when volatility in markets is high, and generally during periods of major market dislocation.
Lots more at: http://gestaltu.blogspot.com/2010/07/jekyll-or-hyde-market.html
A key chart from the post (and a great addition to the posted chart) shows S&P performance absent the worst and best months: http://4.bp.blogspot.com/_XNmbusMmMqo/TD9CvjlgreI/AAAAAAAAAQc/PZUS6U8cOH8/s1600/091024_S%26P_Excluding_Worst_%26_Best_Months.jpg
If you look at the secular cycles that Barry mentions you will find that all major periods of catastrophic stock market loss occur in recessions during secular bear cycles. That is what is interesting to chart. And investment timing does not have to be particularly good for this to have a major impact on portfolio returns and risk. You can be out early and in late and have far higher returns with far less risk than buy and hold. To exit you can use recession indicators such as those used by Hussman or Kasriel or, if the interest rate is not up against the zero bound, you can simply use the inverted yield curve. Or, as Mike C says, you can simply be out when the market is below 200 day MA and reenter when the recession reasonably far along and the market moves above the 200 day MA. But there is no need to be in and out of the market during secular bull periods. You only need to use the 200 day moving average during secular bear cycles. And you can use the Shiller/Graham p/e to define secular bull and bear periods. Secular bull and secular bear periods – and particularly the risk of catastrophic loss is secular bear recessions – are the single biggest driver of equity risk and return. And yet they are not well understood by most professional investors let alone individual investors. We have plenty of charts that show various aspects of this entire issue. The biggest barrier to this approach for most professional investment managers is performance divergence (tracking error).
might as well just go with the “buy low, sell high” — less words, same value.
And I guess that’s why the great Jesse Livermore is quoted as having said that “it can pay a man handsomely to be right…AT THE RIGHT TIME.”
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[...] who try to time the market may be better off sticking with a buy-and-hold strategy. Barry Ritholtz posts a chart at The Big Picture looking at how investors would do if they bought the S&P 500 in 1993 [...]
Mr Ritholtz….re “the luck” of your 100% cash call the day before the flash crash….as a professional money manager I would think that you would focus more on the medium to long term nature of your asset allocation strategy as opposed to the more riskier “market timing” aspect of it. Also… the close of the S&P 500 that day was 1128….and since then, after a seesaw ride this summer the S&P 500 is basically right there today……around 1124…we have gone nowhere in the market and cash returns are the same….so I’m not quite sure what the big deal is about being 100% in cash….even if you reduced your cash levels since then, from a asset allocation standpoint…you have provided no value added performance…if you have it would be interesting to see the attribution analysis that shows it.
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BR: Um, the 100% Cash call was 5 months ago — there have been interim trades and buys & sells to stock positions since then. Click on “Trading” in the lower right hand column under categories . . .
It would be interesting to see a plot of simply selling out of the market when Shiller’s 10-yr real PE rises over 20 and buying back in when it falls below the 15 (roughly the long-term average).
thank you Mr Ritholtz for pointing that out….in the context that many studies have shown (EMH and Dalbar) that market timing or trading as it is more commonly known does not work, it would be helpful if you could provide your readers with the risk adjusted returns of the performance of your portfolio instead of anecdotal evidence…is it too on your website?…thanks
The problem with Market Timing is that most people are not very good at it — not the basic concept. When risk is high, you want to stay out of the way. When things get cheap enough, and sentiment reaches an extreme, you want to make the bet the opposite way.
In terms of returns, we run separately managed accounts (Not a single hedge fun or mutual fund) The SEC only permits publication of audited returns — in other words, I cannot cherry pick the best account, or publish an average of all accounts.
I can tell you we outperformed in 07/08, underperformed the SPX in 2009 (but did ok– just not the plus 29%) and are up slightly for 2010 (outperforming). That is on average; some accounts did better, some worse.
thanks again…..most professional managers do provide audited performance reports and use composites for their separate accounts….you are right about cherry picking….AIMR standards are specific about that too…but there are approved ways of doing it….with the numbers you have I would think that it would be helpful to your asset gathering cause to take the plunge…..also given your market timing style and philosophy of mgmt it would be helpful to see your risk adjusted returns
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BR: We are still small — under half a billion — and the audit costs are prohibitive until you have a larger asset base (~$ billion dollars plus under management).
Right now, we are still building out our offices, admin, support staff, etc.
Glad to see a lot of discussion as it relates to this chart I sent Mr. Ritholtz (who was kind enough to put it on this site). The purpose of this was simply to question why buy and hold works. The reason it does is because you have to be in the market to experience the 10 best days, whenever they may come.
Now, having said that, it is also true that the vast majority of extreme up and extreme down days occur under the 200 day moving average, which is usually indiciative of a shift in economic trend. However, simply buying based on the 200 day moving average going higher and avoiding the 10 best and 10 worst days still results in performance similar to that of buy and hold (a conclusion that Mr. Mebane Faber has also reached).
I don’t believe the average mom and pop investor has any idea about why buy and hold works. RD – to your point about Shiller’s 10 year PE, I will work on getting a chart of backtested performance to Mr. Ritholtz to see the validity of the approach, and also see if that can help determine periods where extreme up or down days are more likely.
Michael A. Gayed, CFA
pensionpartners.com
[...] 17, 2010 by Nanette Byrnes 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 [...]
[...] found this via TheBigPicture, but disagree with the conclusion that you should try to find out how to miss the 10 worst days [...]