A reader asks:
I have a question about reconciling two very famous market analogies. I, your story “Bob is the World’s Worst Market Timer” It perfectly demonstrates the power of compounding and the importance of never selling, even if your entry points are horribly bad. On the other hand, we often hear the statistic that Tom Lee often advocates: If you miss the 10 best days in the market in a given decade, your overall returns practically zero out, or even become negative. My question is: How do these two concepts intersect? Is the secret to Bob’s ultimate success all down to accidentally hitting Tom Lee’s “top 10 days” by not making any sales? (which usually occur in the middle of Bob’s meltdowns)? If we simulated a “Bob” who bought at the peaks, but panicked at the bottom and missed the top 10 return days, exactly how disastrous would the math look compared to the original Bob? I’d love to hear your thoughts on how the “missing the best days” statistic contextualizes Bob’s survival.
For those new here, here’s a refresher on Bob:
There is no magic in Bob’s lousy market timing strategy as the best and worst days tend to occur.
To understand why this is the case, let’s look at the data.
JP Morgan Here’s a good chart of what happens if you miss just a few of the best days:
Missing the top 10 days reduces your annual return by 40%. Missing the best 30 days and getting a return well below the long-term average.
It’s hard to believe but it’s true.
Here’s another way to look at it:
If you missed the best 25 days since 1990, $1 would have been worth $40, while $1 would have only risen to $8 if you remained fully invested.
If you could somehow miss 25 the worst A few days later, $1 rose to almost $240.
However, if you could miss the best of both And On the worst days, it approaches long-term acquisition and retention growth.1
Why is this the case?
One of the reasons why no one can miss the best days or the worst days is that they tend to come together mainly in turbulent market environments.
From this chart Annex A It shows how the best and worst days come together:
The best and worst days since 1990 have mostly occurred around the dot-com crash, the 2008 crash, the Covid crash and the 2022 inflation bear market.
Big moves tend to cluster like this for several reasons:
It creates volatility volatility When markets become tense, investors’ emotions also become tense. During a major crisis, uncertainty rarely goes away in a hurry. Because losses hurt more than gains feel good, these heightened emotions cause investors to become more nervous.
Panic works both ways. Emotions drive markets in the short term, but there are also structural factors at play. Forced selling, margin calls, profit taking and a little fear can cause a sell-off in the first place. Then you have aid rallies, which are a combination of short-term protection, bargain hunting, and hope and policy response.
This leads to both panic selling and panic buying during a crash.
When people lose money, the herd increases. Gustave Le Bon was a French psychologist. The Crowd: A Study in the Popular Mindset All the way back to 1895. This passage summarizes his findings quite well:
The most striking feature of a psychological crowd is this: No matter who the individuals that make it up are, no matter how similar or different their lifestyles, professions, characters, and intelligence are, the fact that they have become a crowd makes them possess a kind of collective mind that enables them to feel, think, and act in a very different way than each individual would feel, think, and act in isolation. There are some emotions that do not occur and do not turn into action, except when individuals form a crowd.
It feels safer to be in the crowd when volatility sets in.
That’s why the best and worst days happen close to each other. This is why timing the market is even more difficult in falling markets.
Did this phenomenon help Bob, the world’s worst market timer?
No, the only thing Bob saved was a long horizon.
He still had to experience the best days and the worst days that usually come after the highs.
I discussed this question in a brand new episode of Compound Ask:
Taylor Hollis We’re on this week’s show to answer questions about estate planning, paying off credit card debt, talking to your mother-in-law about money, advisors hiring advisors, and setting your kids up for financial success.
Further Reading:
What if You Only Invest in the Market Tops?
1what is this actually trend following strategy tries to realize it.
