A Few Good Days….

Nice chart here from Scarlet Fu on Bloomberg Surveillance showing the S&P 500′s returns in total compared to missing the 3 and 5 best days of each year.  As you can see, the returns suffer enormously when you’re not in the market on the 3 and 5 best days.  Of course, this also implies an all equity allocation and doesn’t take into account the potential for better risk adjusted returns by missing the negative days, but it’s interesting nonetheless.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Ilya is right — missing the bad days gives you slightly more uplift than missing the good days drags you down (at least since 2009).

    Interestingly, they’re almost completely offsetting over that time period so that if you missed both top and bottom you’d be performing almost exactly in line with the S&P (albeit with lower volatility).

  2. Since most of us aren’t very good at anticipating / timing the worst days or the best days, it’s logical to conclude that there is a minimum allocation that you should keep in equities at all times. I never go below 10% allocation to equities. I know some folks who have a higher minimum than that. But I was glad during 2008 that I only had about 11% in equities during the worst of it. Now I’m glad that I haven’t completely missed out on a very strong quarter. Something to be said for buy and hold for some portion of your portfolio.

  3. This is an old trick. In practice, the best 5 days are often alternated with the worst 5 days, since high volatility happens in clustered periods.

    The other fallacy is that the most critical periods for performance is NOT when returns are extreme, but when they are strongly autocorrelated, i.e. when you get a systematic trend downwards or upwards (no need for any return to be outsized). Incidentally, this explains also why fat tails are not to blame for the biggest losses in a portfolio.

    • Aha! This is very interesting. Since most popular risk models are measuring the tail risk , how do we measure autocorrelation risk. May be one should measure the deviation of a given stock time series from random walk etc

  4. Mebane Faber and Cambria ran through this and “debunked” to some degree this concept. I was excited to finally find his piece when I did because I had heard the information about missing the best 10 days so many times and every time I had asked: “What if you miss the worst 10 days? Or the best and worst?”

    Here’s one answer:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908469

  5. The best days normally happen near bottoms and as almost no one can pick which days will be up and which down at such times the chances are if you get the best days you will have suffered the worst days as well.

    Mark Lundeen has done a lot of work on market volatility and 2% move days.

    It’s a sales gimmick, when the analysis doesn’t show that the best days are almost invariably near the worst days.