Missing the 10 best days of stock market performance over many years can hurt your portfolio’s performance -- and the only way to make sure that doesn’t happen is to stay invested for the long haul.
It’s an argument that proponents of buy-and-hold investing hold near and dear. But Cambria Investment Management, in El Segundo, Calif., says it’s misleading.
“What (buy-and-holders) fail to realize is that, if you miss the worst days, your return is much, much better,” says Mebane Faber, chief investment officer of Cambria. “And most of the best and worst days tend cluster together.”
The whipsawing market swings of the past few weeks make Faber’s argument, which he laid out in a new and well-timed newsletter. The best and worst days tend to be clustered together -- and to occur in periods when markets are in decline, he said.
As a result, staying invested will get investors not only the gains on the best days, but the losses on the worst days. And those losses will outweigh the gains.
If an investor had missed the best 1% of all days in the market between 1928 and 2010, his annualized return would have plunged from 4.86% to negative 7.08% Yet the opposite is even more significant: Missing the worst 1% of returns would have boosted that investor’s annualized returns to 19.09%, Faber argues.
If the investor had missed both the best and worst 1% of days, his return would have been 5.48%, versus 4.86% had he remained in the market at all times.
In other words, buy and hold loses. (Also, we should all be as long-lived as that investor.)
Yet many investors have concluded that rare events -- such as major market swings -- are impossible to predict. Therefore, they reason, buying and holding investments and waiting for the market to neutralize big dips is the only logical course of action, according to Faber.
Cambria’s advice to investors is to try to avoid declining markets, where most of the volatility lies. Between 60% and 80% of the market’s best and worst days occur after the market has already started declining, the firm found. Investors’ psychological responses to periods of decline ensure that, argues Faber.
Cambria, a quant shop, asserts that contrary to popular belief, market timing and risk management is possible. It’s the company behind the $175-million-asset Cambria Global Tactical ETF. The ETF has flexibility to buy and sell a wide range of asset classes around the world, and to hold them for varying periods. A month ago the fund was mostly invested in the market, and now it’s largely in cash and bonds, Faber said.
Since August 1, Cambria’s Global Tactical ETF is down 5.4%, compared with a decline of 11% for the SPDR S&P 500 ETF.
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