You’ve probably heard the investing maxim that if you miss just a few of the best days in the stock market over a decade or more, your returns will be drastically affected.
For example, JP Morgan calculated that if you missed the 10 best days over a 20 year period up to the end of 2018, your returns would have been halved: instead of a $10,000 investment turning into a $30,000 investment, it would have become just $15,000. All because of 10 days!
Statistics like this are often wheeled out to scare small children and support the argument that you shouldn’t try to time the market. Try to get clever and miss just those few critical days, and you’ll have done yourself serious damage.
Well, like most maxims, it’s grounded in truth – but has been extended way beyond its original context, to the point where it risks seriously damaging your wealth.
The best days aren’t random
The “best days” argument implies that you should remain fully invested at all times, because you never know when those best days are going to come. For all you know, next Tuesday could be one of the best days in years. If you pull out your cash on Monday because you have another use for it, you’ve engaged in an act of financial self-harm!
This makes it a close cousin of another well-worn saying: “it’s time in the market, not timing the market that counts”.
But here’s the thing: the best days don’t just occur randomly. They usually closely follow the worst days.
For example, if you’d pulled your money out of the Dow Jones just before 21 October 1987 you would have missed a 10% gain – oh no!
But you’d also have missed a 22% fall just two days earlier, and an 8% fall five days later!
The same was true more recently, when the market grew by 11% on 24 March 2020. Not one you’d want to miss…except that there was a 13% fall eight days earlier, and a 10% fall just four days before that.
In both examples, if you’d not just missed the best days but also missed the entire month in which they occurred, you’d have been better off than if you’d stayed invested the entire time.
So can we take anything useful from the admonishment not to miss the best days?
Yes: it makes a strong case for not selling in a panic. Looking at the history of market movements shows us:
- Prices tend to drop sharply over a short period, rather than drifting downwards.
- This initial sharp drop is often “over-done” and they recover some (not all) of the losses in a matter of days or weeks.
- After that quick semi-recovery, they grind upwards over a much longer period of time until they get back to where they were (and beyond).
So selling immediately when you see the first headline about a big fall is generally the worst thing you can do: you’ll lock in the loss and miss out on a degree of rapid recovery.
Market timing isn’t all bad
We’ve seen that the warning about “missing the best days” is helpful as a warning about pulling out in a panic after a sudden drop. But we’ve also seen that it isn’t helpful to interpret it as “you should never try to time the market at all”: missing the best days is actually the best thing you can do, if you miss the surrounding worst days too!
If you can time the market well – by reducing your exposure when things seem suspiciously good and getting back in once prices have fallen – you’ll do far better than just staying invested the whole time. Because the best days follow the worst days, even if you miss every single “best day”, you’ll still come out ahead if you avoid the entire month.
This is where one of my financial principles comes from:
Timing the market well is better than not timing it at all. But timing it badly is even worse.