## Missing the Best and Worst Days

Almost all big stock market gains and drops are concentrated in just a few trading days each year. Missing only a few days can have a dramatic impact on returns. Figure 4-2 illustrates how an investor who hypothetically remained invested in the S&P 500 Index throughout the 20-year period from 1994 to 2013 (5,037 trading days) would have earned a sizable 9.22% annualized return, growing a \$10,000 investment to \$58,352. When the five best-performing days in that time period were missed, the annualized return shrank to 7.00%, with \$10,000 growing to \$38,710, and if an investor missed the 20 days with the largest gains, the returns were cut down to just 3.02%. If the 40 best-performing days were missed, an investment in the S&P 500 turned negative, with \$10,000 eroding in value to just \$8,149, a loss of \$1,851.

Figure 4-2

Many market timers want to miss the worst-performing days, an even bigger issue than the problem of missing the best days. The predicament, however, is that the worst days are equally concentrated and just as difficult to identify in advance as the best days. If someone could have avoided the worst days, they would have obtained true guru status. Figure 4-3 illustrates the value of missing the worst-performing days in the 20-year period from 1994 to 2013. If the 40 worst-performing days of the S&P 500 Index were missed, an investor's increased return would have been 893% more than investors who stayed in the market every day throughout the entire 20 years. The problem, however, is finding the crystal ball that can forecast the 40 worst performing days out of 5,037 days. This shows how market timing can be tempting and alluring.

Figure 4-3

University of Michigan Professor H. Nejat Seyhun analyzed 7,802 trading days for the 31 years from 1963 to 1993 and concluded that just 90 days generated 95% of all the years' market gains — an average of just three days per year.1

The expected return of the market is essentially constant and positive. Therefore, investors who are out of the market for any period of time can expect to lose money relative to a simple and low-cost buy-and-hold strategy.

-1 H. Nejat Seyhun, University of Michigan, "Stock Market Extremes and Portfolio Performance," commissioned by Towneley Capital Management, 1994
Step 4Fisher BlackH. Nejat SeyhunMarket Timing