It’s OK to miss the best days
So you can ignore that misleading nonsense
If you follow the money pages of any newspaper, you cannot have missed the ‘missing the best days’ story.
But what they won’t tell you is that this story is … complete and utter nonsense.
So, let’s expose it for the grossly misleading rubbish that it is – before you base any of your investment decisions on it.
Sooner or later, someone (or some fund manager) is going to try to mislead you with this story. So, best to understand the game they’re playing now right?
The image below (the black and white bit 🙂 ) is something I obtained in late 2017 at a consumer-facing investment seminar.
I will, for now, spare the supplier (a large fund management group) from humiliation – as I feel it would be unfair to pick on one fund manager or one firm of advisers for misleading you with this story.
The truth is that it’s used by a lot of them 🙁
Some of them, it seems, are perfectly happy to SELL you an investment product at any cost. They’re not going to let some balanced truth get in the way of another sale.
But my mission is to help you see through the lies and deceptions of firms like that. And I think that you need full and balanced information about your various financial options.
Frankly, this is something you simply cannot afford to be without.
Okay, so what’s the big problem?
Well, when stock markets hit a bad patch (and when they’re overstretched as now) you’ll see a lot of messages and news articles telling you that there’s no need to worry.
Now, I can tell you precisely why this is. You see, I worked as a product development manager on the ‘inside’ of the investment and pensions industry for many years.
At times like this, the senior folk in some fund management groups get jumpy about their revenue – as do some ‘wealth management’ and ‘financial adviser’ businesses.
That’s because the fund managers get paid on a ‘percentage’ of your funds under management (FUM) – and a lot of advisers get paid on a percentage of your funds under their advice (FUA) on top.
So, if markets fall, they know that they’re going to lose income.
What’s more, if people then start taking money out of their funds – these fund managers and advisers face a double whammy drop in revenue.
So they feel a need to do something about that. And typically they’ll instruct their marketing departments to ‘put out positive messages’ when markets turn aggressively south
Unfortunately, not all marketing people are as knowledgeable (or honest) as my old team. So, I’m afraid that they can’t all be relied upon to tell you the truth, the whole truth and nothing but the truth – when it comes to investment returns.
So, some investment fund marketing folk (and some advisers) will develop a story based on misleading information which, when markets turn south, they feed to the Press or send directly to you!
And what busy financial journalist can resist a good ready-made story? 🙂
This is how that story misleads you!
Please get to grips with this – and whatever you do – do NOT base your investing decisions on this “missing the best days” nonsense.
The story starts with what’s claimed to be a golden rule for investing.
I call this part of the story – the “time in the market” mantra. It’s a catchy little phrase that you may have heard before – because it’s been trotted out more times than you and I have had hot dinners – and it goes something like this:
It’s the time in the market, not timing the market, that delivers the best investment returns.
Of course most investment sales people know that simply giving you a rule like that is not good enough – and that you’ll want to see some evidence to back up the claim.
So, if you challenge a sales person who trots out that ‘corny’ rule on investing – you’ll usually be shown a set of numbers or a graph like the one you see above.
And that chart certainly appears to prove their point doesn’t it?
What it appears to show is that we’d have to be ‘stupid’ to take our money out of the markets at any time.
The so called ‘evidence’ used to back that rule – is based on what would happen if you missed out on the best days in the markets (the days when the markets make their biggest gains)
Do that, so the story goes and you’ll ‘wipe out your chances of making good returns over the long term’
Is this starting to sound familiar?
Good, then read on 😉
Of course, statistics can be useful to prove a point – but only if presented in a fair and balanced way.
And the plain truth is that the ‘missing the best day’s story’ is not fair, or balanced at all
You’re being tricked
The really sneaky thing here is that the data you’ll be shown is correct …
Yes … grossly misleading but correct!
It’s true, you see, the biggest market gains do occur on a small number of days. And, once you’re shown the proof for this, you might well be convinced to stay invested in the markets at all times.
The trick these folk are playing is to only tell you part of the story 🙁
So, we need to slow down here …
… and think about this claim more carefully, just as we do when we look at this image.
Are you sure?
Take another look …
… and another …
… and keep looking until you spot a problem!
Now, let’s think about that ‘missing the best days’ story more carefully.
How could you possibly arrange to buy and sell units in an investment fund, with such precision that you’d be out of the market for a number of the best days – but only on those days?
Surely that’s an impossibly bad feat of bad timing?
Yes, of course, it is … quite impossible.
And it’s grossly misleading to use this impossible scenario in marketing to try and influence your investment thinking.
Indeed, Greg Cooper (a senior manager in Australia for Schroders, a leading investment house) said the same, when he debunked this idea in a communication to advisers in May 2009.
A challenge to fund managers and advisers
Will Schroders Australia be the only fund manager brave enough to debunk this myth?
Or are there some others who are happy to ‘call out’ this myth for the lie it is?
It would be wonderful to hear from some fund managers in the comments below.
In the meantime let’s continue debunking this story for ourselves.
Now, here’s a question for ‘Tweeting’ …When do the very ‘best days’ in the stock market occur?Click To Tweet
Well, it should come as no surprise to you . . . that they quite often come – right on the heels of the very ‘worst days’!
So, this means that if you decide to ‘get out’ of the markets for a while (by parking more of your funds in cash or in short term government bonds) and you miss out on the best days, then the chances are that you’ll have missed out on some really bad days too 😉
Which means that on average, it’s really no big deal to be out of the markets for a while.
And if it helps you sleep a bit better, then that could be a very good reason.
The KEY point about investing is this:
The amount of your money that’s right for YOU personally to hold in the ‘markets’ at any given time should reflect:
- Your general attitude to investment risk and
- Your capacity for risk on each of your personal financial life goals and
- Whether your funds are being managed with your downside risk in mind.
Most financial advisers will pay some attention to point 1 but not all of them pay enough attention to point 2 …
… and some pay no attention to it at all. So, watch out for that.
A good active and defensive fund manager can help with point 3 . . . up to a point but most are inclined to ‘run with the herd’ themselves and stay fully invested for fear of falling down the performance tables.
You can learn more on all these issues in my book, ‘Who misleads you about money?’ and for updates on these articles sign up to my newsletter here
Of course ,some advisers or fund managers may be reluctant to offer you this kind of completely unbiased view.
Some prefer to keep twisting the facts in the hope of retaining more ‘revenue earning’ funds under management.
But you need the facts – so let’s look at them
If you search hard enough, you can find some nice balanced data on this ‘missing the best days’ nonsense from various sources.
A very good but quite detailed article, from Mebane Faber, can be found here
But for our purposes I want to keep this simple.
So, let’s just look at the raw data for returns on the S&P 500 Index in the USA (the world’s largest stock market) over the past 25 years.
And, please note that these numbers ignore inflation and reinvested income and any charges you’d incur on your funds or for advice.
Here’s the TRUTH you need – to counter the fake news
Over the past 25 years
- The average return on the US stock-market was 6.9% p.a.
This would have been your investment return (before charges) if you’d invested in that index and stayed invested for the whole period.
And if you prefer currency to percentages – this would have turned $10,000 into roughly $53,000 over the same period.
A nice return indeed.
Of course, if you’d been “silly” enough 😉 to have missed out on the best 20 days on the stock market over this period:
- Your returns would have been significantly reduced – to just 2.0% p.a.
- Turning your $10,000 into about $16,000.
Yes, ‘wow’ that’s quite a difference, isn’t it?
But what about another story – and one you’re unlikely to hear…
… what if, instead of being so unlucky as to miss the best 20 days … you’d been
brilliant lucky enough to have missed the worst 20 days?
How might that have affected your returns?
- Well, by missing the 20 worst days over this period – your returns would have increased to 12.6% p.a.
- enough to turn $10,000 into c. $192,000
Now these are incredible numbers, aren’t they?
Yes, but that’s exactly the point …
… they’re “incredible”, or rather they’re impossible to achieve by any deliberate means.
And you’ve got more chance of finding a needle on the surface of the moon than getting these returns by accident!
So, it’s really quite stupid (And yes, I do mean ‘super’ stupid) to say that by choosing to be out of the market at certain times you will only miss out on the best days – and still be exposed to all the worst days.
Similarly, it’s stupid to say that you could somehow avoid all the worst days and catch all the good days.
The simple truth is this.
When you’re out of the market you miss both the good and the bad days.
And that’s kinda obvious when you think about it eh?
Now, just for completeness – in case you want to know …
If you happened to be out of the market on exactly the right days to miss BOTH the best 20 AND the worst 20 days, well …
- Your annual returns over this particular 25 year period would have increased to 7.4% p.a.
- Turning your $10,000 into about $60,000.
And interestingly that’s better than simply staying invested throughout 😉 …
but we need to come back to planet earth here – because this is still not an outcome that you could possibly engineer!
How could you possibly know when to be out of the market for the best and the worst days ?
When do these extreme days happen?
What’s far more interesting is when these ‘extreme’ days in the stock market happen.
Most of them occurred during just two years – 2008 and 2009.
In short, our markets shook violently as the banks fell apart.
So, what we know for sure is that,
… a lot of the best days in the stock market occur when it’s tracking downwards!
Indeed, if you dig deep into the data as Mebane Faber has done in his article for which he used 82 year’s worth of data (from 1928 to 2010) it turns out that:
Nearly 80% of the best days occurred in falling markets.
For example, those who invested heavily (and a lot did) into the UK stock market at the turn of the millennium, suffered price falls of over 50% in the following three years, despite enjoying plenty of those ‘best up days’ along the way!
Of course, if you remind an aggressive investment salesperson of those times, you’ll be told that by sitting tight at that time you’d have seen your investments recover by the summer of 2007.
And that’s true … but then so is the fact that the market then proceeded to crash again by another 50% in 2008-09.
The index was down about 50% some nine years after the start of 2000.
And that was a vicious roller-coaster for your money, even if you had a steel stomach.
It’s okay to give in to your fears
Finally, on this Insight, I want to share another remarkable but true piece of evidence from Michael Edesess.
You may recall that I’ve used an extract from Michael Edesess book, (The 3 simple rules of investing) to debunk another flawed ‘sales aid’ used by a lot of financial advisers. More on that here
Edesess is an accomplished mathematician and economist. He’s also the author of The Big Investment Lie, and a visiting fellow in the Centre for System Informatics Engineering at City University of Hong Kong and a research associate of the EDHEC–Risk Institute.
Now, as we’ve seen above – it’s okay to be out of the markets now and then because you don’t just miss the best days . . . you miss the bad days too.
But most people would agree that it would be a terrible idea to wait until markets have fallen a bit before you come out for a while – and an even worse idea to wait again for markets to recover quite a lot – before you go back in.
And yet . . . Michael Edesess has run the numbers on exactly this kind of investing behaviour – using 90 years worth of data – and guess what he found?
Firstly he looked at the classic buy and hold (and regularly rebalance) approach of investing – based on a typical (60/40) investment portfolio (of shares and bonds)
This approach would have given returns of 7.64% p.a. (ignoring charges)
Then he looked at the returns you might have achieved if you’d followed what we might call a ‘controlled fear and greed’ approach – and got OUT of the market each time it fell by 10% from its last high AND then jumped BACK IN to your investment after it’s value rose 35% from its last low.
Sounds like the worst thing you could do right?
Indeed it even runs completely counter to what most people would tell you to do – which is to buy more on the dips!
And yet this approach would have delivered returns of 7.87%. p.a. just a bit more than the classic buy and hold approach.
This is how it would have worked over the years after 1999.
And, as you can see, in times of extreme market falls – which of course ‘kick off’ with a 10% fall – this second approach might have allowed you more sleep too – because you’d have been out of the market during those super steep falls.
Indeed according to Edesess – over the whole 90 year period of his analysis this approach would have meant being out of the market on average for 40% of the time.
And that’s something virtually no adviser would advise you to do.
What can you conclude from all this?
Am I suggesting that this ‘fear and greed’ way of investing is right for you?
Well, no I’m not.
It’s simply not possible to say what’s right for you personally from this (or any other) website.
You approach to investing needs to be aligned to your own personal circumstances as I’ve pointed out many times – including here
What we can say is that this ‘missing the best days’ story is TOTAL nonsense.
So please don’t fall for it – and don’t worry about being out of the markets for a while.
Understand – and pay attention to – your personal capacity for investment risk.
And to understand what that means – head over here
I hope that you’ll keep coming back here to check how the Financial Services industry (and others) might mislead you about your money.
And please take extra special care out there right now
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