We’ve previously discussed missing the worst days — and why it more than makes up for missing the 10 best days.
Javier Estrada looked at this issue over the 1900 to 2010, and came up with some surprising results:
$100 invested in 1900 would have returned $25,746 by the end of his study. Yet if you missed just the 10 best days of that period, your net returns would have been $9,008 — nearly two-thirds less than Buy & Hold. Miss the best 100 days, returns would have been a paltry $87 over more than a century.
Ahh, but what about the worst days? If you avoid them, you outperform. Miss the worst 10 days of Dow losses, and your total rise to $78,781. And over the course of that century plus, if you missed the 100 worst days, your returns skyrocket to $11,198,734.
This is the best reason I have seen to be an active investor. Now the question becomes, can you really miss the worst days but not miss the best days . . . ?
Here’s the abstract from Estrada’s research:
Do investors in the U.S. stock market obtain their long term returns smoothly and steadily over time, or is their long term performance largely determined by the return of just a few outliers? How likely are investors to successfully predict the best days to be in and out of the market? The evidence from the Dow Jones Industrial Average over the 1900-2006 period shows that a few outliers have a massive impact on long term performance. Missing the best 10 days resulted in portfolios 65% less valuable than a passive investment; and avoiding the worst 10 days resulted in portfolios 206% more valuable than a passive investment. Given that 10 days represent 0.03% of the days in the sample, the odds against successful market timing are staggering.
$100 invested in 1900 would have returned $25,746 by the end of his study. Yet if you missed just the 10 best days of that entire ride your total pot at the end would be $9,008, almost two-thirds less than maintaining constant market exposure. Had you missed the best 100 days you would have earned just $87 in that century-plus stretch.
The flip side, of course, is that if you avoid the worst days you also outperform. Had you missed the worst 10 days of Dow losses you would have seen your total rise to $78,781. The worst 100 would have earned you $11,198,734.
Source:
Black Swans, Market Timing, and the Dow
Javier Estrada
IESE Business School November 2007
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1086300
Noise & The 10 Best Days
Mebane Faber
March 27th, 2008
http://www.mebanefaber.com/2008/03/27/noise-the-10-best-days/
(This may have been referencing a prior version of this paper)
Black Swans and Market Timing: How Not to Generate Alpha
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1032962
