It’s OK to miss the best days

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 … well… 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 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 just not prepared to allow balanced truths to get in the way of sales.

But you need to see through lies and deceptions of firms like that – and that’s my mission here. To provide you with balanced information about your various financial options.

Frankly, this is something you 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 giving you reasons why 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. And 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, both fund managers and (some) advisers fear that they’ll lose income.

What’s more, if, in addition to markets falling, 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, 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.

Some investment fund marketing folk will grab at this classic but misleading story, whenever markets turn south, and feed it to the Press or send it directly to you!

And what busy financial journalist can resist a good ready-made story?  🙂

This is how that story misleads you!

I urge you to get to grips with this – and whatever you do – do NOT base your investing decisions on this “missing the best days” nonsense story.

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.

Indeed, 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.

Now 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?

Indeed, it appears to show that you would be stupid to take some or all of your 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

Miss those ‘best days’, so the story goes, and you’ll ‘wipe out your chances of making any decent 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

You see, the really sneaky thing here is that the data you’ll be shown is correct …

Yes… correct… grossly misleading but correct!

WTF?

Let me explain.

Well, the simple fact is that the biggest market gains do occur on a small number of days. So, once you’re shown the proof for this, you might well be convinced to stay heavily invested in the markets at all times.

The problem is that these folk are only telling you part of the story 🙁  and relying on your natural, human nature to miss the other facts – by failing to look out for them.

Here’s an example.

Take a look at this image… and read what it says – out loud.

Are you sure you’ve got that right?

Read it again…

… and again…

and keep reading it…

… until you spot a problem!

Funny eh?

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. It’s quite impossible.

And it’s grossly misleading to use an 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.  And you can find Greg’s excellent deconstruction of this nonsense right here.

A challenge to fund managers and advisers

Which other fund manager is brave enough to debunk this myth?

Or at least, to commit to stop using this story in their marketing.

I know of one – are there others?

Now, when do the ‘best days’ in markets happen?

Well, it should come as no surprise to you… that the best days often come – right on the heels of the ‘worst days’ – and there’s more evidence on that below.

So, what?

Well, this means that if you were to take some or all of your money out of stock markets for a while (for example by parking more of your funds in cash or in short term government bonds) and you happened to miss out on the best days, then the chances are that you’ll have missed out on some really bad days too  😉

And that means, on average, it’s really no big deal to be out of the markets for a while. Indeed, if it helps you sleep a bit better whilst you undertake a proper review of how your money is invested, then that could be a very good reason.

Some key points about investing:

The amount of your money that’s right for you to hold in the ‘markets’ at any given time should reflect:

1. Your personal attitude to investment risk
2. Your need, if any, to take investment risk
3. Your capacity for risk – on each of your financial life goals and
4. Whether your funds are being managed with your downside risk in mind.

Most financial advisers will pay some attention to points 1 and 2 but not all of them pay enough attention to point 3… and some pay no attention to it at all. So, watch out for that.

And whilst a good active and defensive fund manager can help with point 3 – up to a point… many fund managers are inclined to ‘run with the herd’ themselves and stay fully invested for fear of their fund’s performance dropping down the performance tables. So, you’ll need to look hard for a fund manager who can help you on point 4.

Sadly, there are too many advisers or fund managers who keep twisting the ‘best days’ data in the hope of winning or retaining more funds under management.

But you need the facts – so let’s look at them

Search hard enough, and you’ll find some nice balanced data on this ‘missing the best days’ nonsense from various sources.

A good, albeit, detailed article, is available from Mebane Faber, 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, 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.

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.

Here’s the pictureWow!

Yes, ‘wow’ that’s quite a difference, isn’t it?

But let’s look at 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

And here’s the picture for that scenario

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.

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 – isn’t it?

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 ?

You can’t.

When do these extreme days happen?

Well, as I said above, what’s far more interesting is when these ‘extreme’ days in the stock market happen. And most of them occurred during just two years – 2008 and 2009.

In short, our markets shook violently as the banks fell apart. See here

And, if you’re not quite sure what happened in these years – here’s the picture.

Indeed, if you dive deep into the data as Mebane Faber has done here with 82 year’s worth of data (from 1928 to 2010) it turns out that:

Nearly 80% of the best days occurred in falling markets.

So, 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.

So, do take care out there and please… if any adviser or fund manager tries telling you this ‘missing the best days’ story just send them a link to this article.

Investment is a serious business and you deserve better than that.

Thanks for dropping in

Paul

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