Friday, July 21, 2006

Read: Missed the best "x" days in the market, once too often!

Although I think that market timing is tough for most investors, I've suggested that many successful value investors regularly parlay this skill of being slow to redeploy resources when it's tough to find value into a superior market return. These "market timers" seem unusually successful to me, even at the expense of being "underdeployed" in the market at certain times.

But I've just read - once too often - another rendition of the same old chestnut purporting to show how if you'd missed the best 5, 10, 20 etc. days in the market over the past 1, 5, 10 years, etc. your return would fall from 12% annually to 1, 3, 5% etc. over the same period. And this is purported to be rationale to stay fully invested in the market at all times.

What this old tale seems to me to miss, is that those days with a dramatic boing have lots of times followed days where a drop has been almost as dramatic, has been preceded by a day or two where there's been a notable fall. So, by missing the best X days, you often would have missed some of the worst days right around that time too.

So I think that your overall return rate may not have been diminished that much, if you include a couple of days on either side of the boing day: more like real life, yes?

Big ups and downs are often correlated: rather like a trampoline, don't you think?


The Confused Capitalist

1 comment:

George said...

This week did display some nice bounces.