One predictable result of a down market is a rash of articles extolling investors to stay fully invested and not to try to time the market because they are doomed to failure. After all, runs the most common theme...What if you miss some of those very good days because you are out of the market? Of course, your returns would be greatly diminished.

This is the story line pushed by Wall Street institutions who have a vested interest in keeping investors fully invested at all times, but we suspected there was much more to this story that keeps getting repeated.

To set the record straight, we studied the daily return of the S&P 500* stock index for 20 years ending December 31, 2003 (5,045 market days), and discovered some startling results. The average annual rate of return for this period was 10.01%.

Missing just the 10 best days during that period dropped an investor’s average annual return to only 7.10%. Miss the 20 best days and you make only 5.03% per year. Miss only the 40 best out of 5,045 days and your annual return drops to a measly 1.60%. You might as well have buried your money in the back yard.

One might even buy this stay-invested argument until you look at the other side of the coin. What happens if an investor misses the worst days? Now the potential payoff of moving your money shines as performance soars.

Miss just the worst 10 days during the 20 years and your return rose to an admirable 14.52%. Miss the 20 worst and you would have made a handsome return of 16.86% per year on average. Miss the 40 worst days and your average return jumps to an eye-popping 20.69 % per year.

Actually, both arguments have very little statistical validity. The chances of missing only the best or only the worst days of the market are remote, because best and worst days sometimes occur back-to-back. If you miss one, you’ll probably also miss the other. So the question really should be, what happens if you miss both the best and the worst days? The data shows that an investor would actually exceed buy-and-hold performance and achieve a relatively stable return of around 11.5% per year whether just the best and worst 10, 20, 30, or 40 days were missed Part of the reason that missing both best and worst days equally boosts performance is that the worst days tend to go down further than the best days go up. Plus, there’s the mathematics of gains and losses. If you lose 20% you have to achieve a 25% gain to break even. A 50% loss requires a 100% gain to return to breakeven. If you tally up the bad days for the S&P 500 over the past 20 years, cumulative losses from just the 10 worst days add up to 76.02%. Recouping those losses would take a 317% gain, and that’s just to break even.

Making these statistics even more interesting is the historical pattern of best and worst days. Genuinely bad days in the market rarely happen in isolation. There is typically a pattern of nervousness in the market, a series of small losses that may accelerate until suddenly investors as a whole turn skittish, pushing the market down to a bigger loss. As we stated earlier, often the best one-day returns occur shortly after a major decline.

Wall Street’s propaganda machine would have investors stay fully invested through thick and thin. After all, Wall Street makes money when they have your money to work with. This study suggests that risk may be reduced and returns boosted by strategic retreats from the market.

The S&P 500 is an unmanaged index of stocks considered representative of the broad stock market. Investors cannot invest directly into an index. Past performance is no guarantee of future results. This data is for illustrative purposes only and is not indicative of the performance of any investment. Source: Yahoo finance. Analysis performed by Will Hepburn, CFP, Hepburn Capital Management, LLC.

Will Hepburn is a private investment manager who specializes in active investment strategies. He owns the Prescott Center for Adaptive Market Strategies, and is President of Hepburn Capital Management, LLC, a Registered Investment Advisor. He may be reached at 2069 Willow Creek Road, in Prescott, or by calling (928) 778-4000 or emailing This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

Copyright 2004. Permission to copy granted given the above attribution is included.