In my last post, 2008: The Final nail for Buy and Hold, I referenced a common marketing piece that gets dragged out by the financial services industry when ever the stock markets get choppy. The piece has many iterations over different periods of time and analyzes average annual performance of the S&P 500 if you bought and held the whole time and the average annual returns had you missed the 10, 20, 30, 40 best days in that period of time. What I showed in the last post was the other two stories – missing the worst days and then missing both the best and worst days. The question is can you actually miss the best and worst days or get close?
You Can Get Close
If you did not read the last post, here is a best and worst day study from the beginning of 1984 through the end of 2008. If you would have bought and held the S&P 500 in this period of time you would have realized an average annual return of 7.06%. Now lets look at if you would have missed some days.
| Days Missed | Missing Best | Missing Worst | Missing Best & Worst |
|---|---|---|---|
| 10 Days | 4.10% | 11.23% | 8.15% |
| 20 Days | 2.15% | 13.80% | 8.58% |
| 30 Days | 0.54% | 15.83% | 8.61% |
| 40 Days | -0.93% | 17.59% | 8.82% |
(Source: NAAIM, Inc., This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)
The Secret
So, the question is how would someone get close to missing the best and worst days thereby giving yourself a better shot at lower volatility with consistent returns. The answer is simple buy when the S&P crossed above its 200 day exponential moving average (EMA) and sell when it fell below its 200 day EMA. The 200 day EMA is a common technical analysis indicator of a healthy stock or ETF or an unhealthy stock or ETF. You can chart the 200 day moving average in places like Yahoo stock charts for any stock, or ETF.
Here are some statistics using the the Vanguard Index 500 Fund (ticker VFINX) from the period 1/1/1985 to 3/9/2009 (yeah, I know I have an extra two years in my study versus the NAAIM study above but you will get the point):
WORST DAYS from 1/1/1985 to 3/9/2009
- 42 of the 50 worst days happened under the 200 day EMA (84%)
- 81 of the 100 worst days happened under the 200 day EMA (81%)
- 147 of the 200 worst days happened under the 200 day EMA (74%)
BEST DAYS from 1/1/1985 to 3/9/2009
- 45 of the 50 best days happened under the 200 day EMA (90%)
- 74 of the 100 best days happened under the 200 day EMA (74%)
- 123 of the 200 best days happened under the 200 day EMA (62%)
Conclusion here is that in one simple trading method you could have missed the majority of the best and worst days in the period of time referenced. Consider the of the 200 best and worst days noted above it favors that you get more of the good days and less of the bad. You can see this in the fact that you would have missed 74% of the worst days and only missed 62% of the best days.
Now you not only know the rest of the best and worst day story, you know a simple way to miss many of the really bad days in the market and still get some of the good days.
