- Over a 40 year period, $1,000 became $86,000. If you missed 1% of the days, you ended up with $4,400.
- A University of Michigan study covering 30 years showed that if you missed 1.2% of the days, you missed 95% of the profits.
- From December 1991 to December 2001, the S&P 500 went up 12.94%, but if you missed the best five days in 10 years, your return dropped to 10.2%.
- If you missed the best 40 days in 10 years, your return dropped to -0.56%.
Can you tell me when one of the 40 best days is coming? Timing the market is a two decision process. The first decision, when to get out, is hard enough, but the second decision, when to get back in, comes with its own landmines.
You as an individual investor are constantly bombarded with mixed messages. Consider that on the very same day the Fed chairman sees a recession in the New York Times, the same Fed chairman doesn’t see a recession in the Wall Street Journal. Who do you believe?
When are you going to get out? If you’re referencing the speculation industry, how will you know? Then, you have to make a decision of when to get back in. What will things feel like when you want to get back in? You allowed certain cues to determine when you got out, so you must define the rules of the game to determine when you’ll get back in. But who defines the cues and how do you know the cues actually mean what you think they mean?
Knowing the Right Answer
We’re also familiar with the concept of knowing the right answer versus doing the right thing. We all know the right answer, but it’s not going to make it any easier to do the right thing. So what’s the right thing? Refuse to read the speculation and avoid talking to people who let short-term panic drive their decision making. Keep in mind, if you want to get out of the market that’s fine, but let’s talk about it before you do so, taking into account the weighty evidence of history. Emotion shouldn’t determine your decision.
- 3 of the 10 best days followed the 10 days following Black Monday in 1987
- 4 of the top 10 days occurred during the burst of the dot-com bubble, including 2 right as the market was bottoming out and heading back up
It’s darkest right before the dawn, and we don’t ever know when dawn will come, and by the time it registers, you’ve missed one or two of those best days, slicing percentage points off your long-term returns.
More Than Investments
Investing is not about finding the best investments…it’s about becoming the best investor. Best investors see opportunity where everyone else sees danger. Remember the difference between a temporary decline and a loss: if you don’t sell, you’ve had a temporary decline. It may mean months or it may mean years, but it’s temporary. If you do sell, now you have turned a temporary decline in value into a loss. That’s the big distinction.
The biggest purchases most people make in their lives are homes and cars. When it comes to real estate and automobiles, we’re ecstatic when we find something marked down. But when it comes to equities, it’s the opposite of what many investors do. They can’t get enough of equities when they are marked up versus selling when they’re a deal.
The Tuna Example
If you bought a can of tuna fish for $2 one week and it went on sell the next week for $0.50, you wouldn’t return the $2 can for a $0.50 refund. You’d back up the truck and get your supply for the year. Why do we apply a different set of words when it comes to equity investing?
I’ve talked about the four words that trip people up all too often: “This time is different.” It’s not different, just different circumstances. The reality is that the best days will surprise you because they are unexpected. That’s the only assumption that can be made, that the future is like the past.
This requires faith, patience, discipline, and a little optimism.
What If It’s Really Different?
Let’s assume this time it really is different and there’s going to be a meltdown, leading to the end of the world. What would be the appropriate portfolio for the end of the world? Guns and butter? During the last 100 years, what percentage of time did this allocation make sense? None.
Keep in mind that the day that guns and butter becomes the best portfolio, the money is not going to do us any good anyway because we’ll be living in the hills growing in our own food.
{ 26 comments }
nobody ever does a study that shows how much better you'd do if you miss the worst 5 days of the market. also, the time frame they always pick to make this points happen to be where day 1 is always less than the last day. what if you invested in december of 1999 $10,000? what would you have today? $6100. and what if you missed the worst 5 days of the market in that time frame? I don't feel like figuring it out though.
stop demonizing market timing. it has its place and can help a disciplined investor. the problem isn't market timing, the problem is investors who can't buy/sell objectively.
Hi Carl,
1) I have a serious disagreement. It's a point of view that I simply cannot udnerstand.
“Remember the difference between a temporary decline and a loss: if you don’t sell, you’ve had a temporary decline.”
That is a major misconception that persists year after year. You have a loss. Period. The loss may not be realized. The IRS may not give you a tax break based on that unrealized loss, but when your portfolio declines in value, you have LOST money. Past tense. When your broker issues a margin call, try telling him that is's only a temporary decline and I'm not going to give you any more money. we have a bunch of insolvent banks masquerading as solvent becaise some accounting board told them they did ot have to mark to the market. That's just insanity.
It's true hat the decline MAY be temporary, but it may also represent only the first stage of the decline. Some companies actually go belly-up..
As an investor, your objective is to make your account be worth more tomorrow than it is today. Or next year, if you prefer tp speak in longer-term language. Your stock has gone into the dumper. Your decision is not “should I hold so that this temporary decline will not be a loss?”
The decision is: “Is this the best stock to own NOW, going forward.”
2) On a lesser note, tuna is a consumable. Buying it on sale is know to be a good value. Buying stocks on sale may or may not be a good value.
Best regards,
Mark
http://blog.mdwoptions.com/
If you are a passive investor, then you don't have that last problem because you own index funds.
“Guns and butter,” that made me chuckle. Thanks, Carl.
How have you lost money if you don't sell? Just like you don't make money unless you sell for a profit.
If I bought a $20,000 painting and someone offers me $0.50 for it, but I don't sell it, have I lost just $19,999.50? Of course not. That's all a market decline is (“market” being the key word). If I buy stock and people are offering to buy it from me for less than I paid for it, and I don't want to sell it, I haven't lost any money either.
Your response demonstrates exactly why it's a blind spot for so many people.
Your painting is one of a kind. It has no specific market value. It's worth what you can get for it when selling. The fact that some random person offers to buy your painting at some random price at some random time does not mean that the painting is worth that random price. You probably don't know what it's really worth, and you may not care. This painting is not exactly a liquid investment.
But stocks are fungible. Your shares of XXX company are worth exactly the same as anyone's shares of XXX company – and that value is the price at which they are trading today. The fact that you choose to continue to own the shares does not change their value. Because the stock is trading, some people buy at this price, while others sell. That is no concern of yours.
The value of your account has been reduced by the fact that this stock is currently worth an amount less than the price you paid. That is a loss in any language. As I said the IRS will not give you a tax credit unless it's a realized loss. That may be one of the reasons that people don't see that it really is a loss.
And if the stock rallies back to unchanged in the future, you will have earned a big profit from today's value – which coincidentally offsets the loss you have at today's value.
The bottom line is that you portfolio is worth less today than it was. You lost money. That blind spot is very costly to investors. It gets them to continue to hang onto bad investments, trying to break even. If they could only understand that if they sell the garbage they own now and buy a different stock that is likely to perform better – from today – they can earn the lost money more quickly. But, alas, they prefer to hang onto the old investment – believing that have not yet lost money. It's an illusion.
Your response demonstrates exactly why it's a blind spot for you.
You must be most blissful.
Funny, I was actually thinking the same thing about you.
enough of this nonsense.
Carl,
Once again, great article. Some of the responses that have been given just prove that diversified global investing is not necessarily the path all investors take. Or maybe more to the point should take. The point, I believe; that may have been missed by some, is the part about diversified global investing – as opposed to single stock picking and subsequent timing of when to buy and sell the individual stocks at the “right”, or rather the “most optimal” time – CONSISTENTLY.
Like it has been said by numerous pundits, “Investing is easy…. but not simple”.
Keep up the good work – I enjoy your blogs.
Carl,
Once again, great article. Some of the responses that have been given just prove that diversified global investing is not necessarily the path all investors take. Or maybe more to the point should take. The point, I believe; that may have been missed by some, is the part about diversified global investing – as opposed to single stock picking and subsequent timing of when to buy and sell the individual stocks at the “right”, or rather the “most optimal” time – CONSISTENTLY.
Like it has been said by numerous pundits, “Investing is easy…. but not simple”.
Keep up the good work – I enjoy your blogs.
Thanks for the comments and lively discussion.
I want to make it clear that I use this blog as a forum to ask questions and
provoke thought. You may not always find your solution here, but I hope we
can at least spark a fire that will lead all of us to look at these issues
more critically instead of just counting on tired, old, conventional wisdom.
Painting is one of a kind.Agreed. Dylan used painting to demonstrate his point.
Carl,Dylan, I and others who follow this blog are not into individual stocks. We believe we do occassionally pick performers but can never do that consistently. So we trust the indexes will do the job for us. Albeit, in the long run.
Your point about selling the garbage “they own now and buy a different stock that is likely to perform better – from today – they can earn the lost money more quickly” – is questionable. Wouldn't those same people repeat the same mistake that they did in the first place.
The value depreciation of equities is an acceptable for us. That is why we have two great helpers, Re-balancing and Age=Bond/cash/CD allocation. With time on our side the equity portion should appreciate or break even.
Thanks Mark for bringing in your perspective. It only re-inforced my beliefs.
I don't trade individual stocks either.
“With time on our side the equity portion should appreciate or break even.'
This is far off the original of discussion (is it a loss?), but here's my question: Is that good enough? It SHOULD appreciate – just because it always has in the past? That's not good enough for me. I need to know it will not collapse in my face. I need to know my money is available when I need it – not when the market decides to return it to me. My idea (as Carl already knows) is to protect my assets – regardless of whether the investing style is active or passive. Protect assets with option collars. Prevent the big downside, and in return, sacrifice the big upside.
When you use the term 'break-even, do you mean return to it's original beak-even point, or break-even from this point forward?
I am not being critical of anyone or any investing ideas. I'm joining the conversation.
Is Dylan a regular contributor or regular commenter? I ask because you lumped him with Carl and yourself. The painting was a terrible example, and in my opinion demonstrates why he just doesn't get it. And he thinks I don't get it. there's nothing more to discuss unless you want to offer an opinion.
Conventional wisdom is an oxymoron. It's just regurgitation of old ideas because people are too lazy. or unwilling, to learn anything new.
Mark- thanks for pushing the discussion. It makes us all better. I
think we all need to remember that modern portfolio theory is a
theory, based on only 82 years of data, these are NOT laws of physics!
I'm an occasional commenter here and on other similar blogs, and my position was accurately reflected in majasan's comment.
You've made it clear you think the painting as a terrible example, and that's fine. But I think you're missing the forest for the trees. I'm content agreeing to disagree.
Dylan-
Thanks to you as well. I always enjoy your comment here and on GRS. You
really add a lot to the community.
I loved the painting example.
OK
And it's just the definition of a loss. So it's not important to most people.
Painting is one of a kind.Agreed. Dylan used painting to demonstrate his point.
Carl,Dylan, I and others who follow this blog are not into individual stocks. We believe we do occassionally pick performers but can never do that consistently. So we trust the indexes will do the job for us. Albeit, in the long run.
Your point about selling the garbage “they own now and buy a different stock that is likely to perform better – from today – they can earn the lost money more quickly” – is questionable. Wouldn't those same people repeat the same mistake that they did in the first place.
The value depreciation of equities is an acceptable for us. That is why we have two great helpers, Re-balancing and Age=Bond/cash/CD allocation. With time on our side the equity portion should appreciate or break even.
Thanks Mark for bringing in your perspective. It only re-inforced my beliefs.
I don't trade individual stocks either.
“With time on our side the equity portion should appreciate or break even.'
This is far off the original of discussion (is it a loss?), but here's my question: Is that good enough? It SHOULD appreciate – just because it always has in the past? That's not good enough for me. I need to know it will not collapse in my face. I need to know my money is available when I need it – not when the market decides to return it to me. My idea (as Carl already knows) is to protect my assets – regardless of whether the investing style is active or passive. Protect assets with option collars. Prevent the big downside, and in return, sacrifice the big upside.
When you use the term 'break-even, do you mean return to it's original beak-even point, or break-even from this point forward?
I am not being critical of anyone or any investing ideas. I'm joining the conversation.
Is Dylan a regular contributor or regular commenter? I ask because you lumped him with Carl and yourself. The painting was a terrible example, and in my opinion demonstrates why he just doesn't get it. And he thinks I don't get it. there's nothing more to discuss unless you want to offer an opinion.
Conventional wisdom is an oxymoron. It's just regurgitation of old ideas because people are too lazy. or unwilling, to learn anything new.
Mark- thanks for pushing the discussion. It makes us all better. I
think we all need to remember that modern portfolio theory is a
theory, based on only 82 years of data, these are NOT laws of physics!
I'm an occasional commenter here and on other similar blogs, and my position was accurately reflected in majasan's comment.
You've made it clear you think the painting as a terrible example, and that's fine. But I think you're missing the forest for the trees. I'm content agreeing to disagree.
Dylan-
Thanks to you as well. I always enjoy your comment here and on GRS. You
really add a lot to the community.
I loved the painting example.
OK
And it's just the definition of a loss. So it's not important to most people.
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