“Buy and Hold” works even better than we thought

We recently came across two studies that asked an old question, “What would your stock returns be if you missed the best 10 or 20 days in a 30-year period?” The answer: not good. These studies agreed with those we’ve seen before, but we decided to look at our own data to see if we could learn more about why missing a few days has such a major impact on portfolio returns.

Here are the results for the last 30 years comparing a fully invested $500,000 account in the S&P 500 index with a hypothetical investor who missed the best 10, 20, and 30 days during the period.

Missing just a few days in a 30-year period has a major impact on long-term returns.

Since you don’t want to miss these days, is there a way to predict when these very positive days will occur? And can we make sure we are invested when they happen? Surprisingly, the answer is yes.

Here’s a chart that shows when these great up days in the market occur.

The best days in the market happen right when it’s most difficult to stay invested. 

The pattern is pretty obvious. Over 75% of the best days in the market cluster around periods when most investors are selling or at least not buying: during bear markets and very early in the next bull market. In other words, when investors are most fearful about stocks these outstandingly great days are there for the taking.

To our way of thinking, investors have only two choices—figure out a way to perfectly time all market cycles or stay fully invested knowing that it is during the worst periods in the market when that small number of super-up days will happen. Since market timing is near-impossible, we believe the answer is to suffer the short-term losses of a bear market knowing that capturing these big up days will make you a winning investor in the long-term.

So avoid “downside protection” and embrace the next bear market knowing that great opportunities will be hidden inside.

Best regards,

Daniel A. Ogden