Missing the best and the worst days

You may have come across some articles, which go along the lines of “if you missed out on only 10 of the best days in the market then your returns would drop from 8% p.a. to 2% p.a.”. This is usually followed by the conclusion that timing markets doesn’t work and you simply have to be in the markets through thick and thin. That way you are guaranteed to benefit from those best days in the market and make good returns.

What pisses me off is that this analysis is completely one-sided. It is a half-truth. What do you think the market returns would be if you missed out on just 10 of the worst days? Yeah, I just flipped that. Obviously, missing out on the worst 10 days but still benefiting from the best days, will massively increase your portfolio’s annual returns. I have proof!

You can watch a youtube video (by Financial Choices Matter) about this – the analysis was done over an investment period of 107 years (Jan 1900 to Dec 2006) and the results are below:

As you can see, it holds true that missing out on the best days will reduce your returns. But it’s also true that avoiding the worst days massively increases the investment returns. (For clarity, the buy and hold approach turned $100 into $25,746.)

There’s also a good paper by Mebin Faber about this. I found it very interesting.
Excerpt from Meb Faber’s analysis:

He makes very interesting conclusions such as:

  1. the best and worst days tend to cluster together (volatility clustering) – the majority of both the best and worst days happen when the markets are in a down trend (below a 200 day simple moving average) -> therefore, the ride is much calmer when you’re invested during times of the market being above the 200 day simple moving average.
  2. if you miss both the best and worst days, then your annual returns are better than buy and hold.

The above analysis would suggest that market timing can indeed work and that there is HUGE value in eliminating the bad days. Investing during times when the market is above its simple 200 day moving average could eliminate 60-80% of the volatile days (both best and worst days) and then allow you to benefit from the uptrend. It would be a smooth and relatively boring ride, but the data suggests it would work better than buy and hold.

Bi den! 🙂

Becoming British

We had a day trip to East Croydon today to sort out some stuff for British citizenship. This is the last step you need to go through prior to the naturalisation application being sent off.

We’ve never been to Croydon. It’s a shame the first impression was of a hobo asking for £2. Wow, inflation much? What happened to “spare change please”? They go straight to £2 these days.

The experience at the Home Office (or was it SopraSteria?) wasn’t great but not awful. The email, confirming the appointment, stated that we needed to show up with ample time to spare. We showed up around 9:20 for my 10 AM and my girlfriend’s 10:30 AM appointments.

It was easy to find the building. It was the one with the queue out its door. We’re in lockdown now and hardly anything else was open on the street.

It was cold and we all had to wait outside as we slowly made progress in the queue. I disliked that people who didn’t show up early but right on time always got to cut to the top of the queue. An old chap in a high-visibility vest was calling out “anybody here for 9:30” and then all the 9:30 people went straight to the top of the queue…

That was frustrating. What was the point of instructing us to show up early – to spend the time in the cold? Why was the queue needed at all? I’m glad it wasn’t raining.

We were also instructed to bring all of our original paperwork along with us to the appointment. However, they only checked our passports, nothing else. I spent around £30 printing everything in a Ryman having already uploaded all the documents to a portal. What a waste of time and money…

I’m glad the appointment was free of charge. I can’t believe that if we opted for an earlier appointment (i.e. not in 4 weeks’ time) it would have cost us £90 each. All they did was scan the passport, take fingerprints, record a signature and take photos – no more than 10 minutes per person.

Anyway, we’re glad we’ve dealt with the bureaucrat. Let’s wait and see to hear back from them. Fingers crossed the Home Office doesn’t need any additional information and we get a positive answer soon (apparently this can take up to 6 months, Covid-19 will probably increase this timescale further).

Also, I hope Joe Biden wins and Donald Trump goes away. The stock market seemed to like the idea of Joe winning – this almost reversed all of my drawdown from the last two months and I’m back at £140K net worth.

Bye now!