Given a choice of (1) participating in the best days of the market or (2) missing them altogether along with the worst days of the market, which would you choose?
In a study conducted over 25 years of S&P 500 index history, the answer is surprisingly consistent. Investors don’t need to participate in the best days of the market if they can miss the worst days. Missing both the best and worst 10, 20, 30 or 40 days of the S&P 500 returns outperforms the index by more than 1% annually. Over the 25-year history of the study, that 1% is the difference between a $100,000 investment turning into $673,836 versus $846,624 – a $172,788 or 25% increase in value.
S&P 500 – 25 Years Ending Dec. 31, 2009 – Average Annual Return 7.93%
|Miss the Best||Miss the Worst||Miss Both Best and Worst|
Source: Hepburn Capital Management 2009 Study
With that said, keep in mind this is a hypothetical example and there’s never been an investment strategy that missed just the best and worst days of the market. This study also doesn’t take into account management or trading fees that might be incurred in implementing such a strategy. Nor can you invest directly in the S&P 500 index.
What this example does demonstrate is how important not losing can be to an investor.
2008-2009 was a perfect example. The average mutual fund was up 34.9% in 2009 according to Morningstar. Unfortunately the average loss in 2008 was -40.5%, again according to Morningstar data. At the end of 2009, despite one of the best years for the S&P 500, the average mutual fund was still down -19.7% from where it started in 2008. If that doesn’t seem to add up, you need to do the mathematics of gains and losses. A 40.5% loss needs a 68% gain to make it back to breakeven because you are starting from a much small balance.
Next week, I’ll be sharing some thoughts on the whole BP disaster.
Feel free to email me with any questions or comments at Paul@investfortomorrow.com.
Until next time…
Heritage Capital LLC