Should You Sell Your Stocks When The Market Tanks? The Myth Of Missing The Best 10 Days

A well-worn myth about investing goes like this: Market returns are dramatically lower if you remove just the best 10 days of the market. In the last 40 years, for example, the best 10 days (out of more than 10,000) accounted for almost two-thirds of the stock market return for the entire period. In the last 20 years, the best 10 days accounted for 75%. You should always be invested because missing those days means that your returns will be much lower.

The problem with this myth

Mathematically, the statement is correct. The value of the S&P 500 rose 284% in the last 20 years (not taking into account dividends) but without the best 10 days the number is just 76%.

But it makes absolutely no sense that someone could possibly miss just the best 10 days. An equally flawed argument would be its mirror: someone who misses just the worst 10 days in the last 20 years would be hugely better off: 814% to 284%. Should you try? The answer, of course, is no. You will never miss just those bad days.

This issue is brought up most often during times of high volatility. Such periods create much fear among investors, and some seriously contemplate selling out of everything to avoid further losses.

Remarkably, the market tends to make its largest one-day jumps precisely when volatility is high and the market is in chaos. In fact, 9 out of the best 10 days since 2002 happened during the financial crisis of 2008/2009 or during the very first days of the Covid-19 pandemic in 2020.

The helpful part of this myth

A slightly less unrealistic hypothesis would be that someone seeking to miss the worst 10 also misses the best 10 in the process. From a return point of view, missing both is practically the same as staying put: 319% to 284% in the last 20 years.

The real problem is that it is impossible to time the market, and those who try generally end up well behind those who just remain invested. This is because selling out of fear tends to keep investors out of the market for far too long, and they end up giving up a lot of ground in the early days of a subsequent recovery.

Another reason why it is a good idea to stay invested is that since the inception of the S&P 500 there hasn’t been any 14-year period (or longer) when the stock market lost money. Even the chance that someone would have a negative return in any holding period longer than 7 years is less than 1 in 10. But that chance goes up for shorter holding periods.

This phenomenon is sometimes called “time diversification” which means that average annual returns become smoother and more stable the longer you hold on. Unless you can time the market really well, which is exceedingly difficult if not impossible to do, your best chance of turning out a profit is to just stay the course through periods of high volatility.

Know thyself

Unless you are a professional who is trained to be more nimble, you will likely have very poor results if you try to go in and out of the market trying to avoid the dips. The correct strategy is to stay invested, but you also have to be mindful of how your emotions could derail your best intentions.

Staying in the market through thick and thin could prove difficult if you become too anxious during the market’s worst days. This could lead you to throw in the towel at the worst possible time just to make the pain from even modest losses go away. This is a particularly destructive behavior, and it’s caused by emotions rather than calm assessment.

Investors are humans, and it is not realistic to expect that emotions play no part. Understanding how they can get in your way of success is important, and therefore your investments should reflect your tolerance for risk.

What to do

Practical advice includes not to invest in the riskiest stuff if you cannot suffer large swings in the value of your portfolio, or to choose index funds rather than individual stocks. Keeping a broad diversification among sectors is always a good idea. And forget about comparing your returns with the S&P 500. Virtually all investors should have a mix of assets that aims to capture reasonable, rather than market-beating, returns. This means that you should not be 100% invested in stocks but also in a mix of cash, income-producing instruments and even covered call options. The objective is to keep volatility under control.

If you do all this you won’t have great stories to tell about how you hit it out of the park with some stock you bought. But you also won’t suffer nerve-wrecking one-day losses that end up forcing you to sell at the bottom – a sure way to lose money.

Source: Forbes