THE TEN BEST DAYS ARGUMENT

The primary argument that the financial services industry uses to encourage people to “Buy and Hold” is the ten best days theory. This argument states that if an investor misses the ten best days in a decade that they will see their returns for the entire decade cut in half. The industry backs up this argument with real data and compelling charts. It must be true, right?

Here is an actual analysis of the ten best days theory that I pulled from a website of a major national investment firm.

This firm analyzed the performance of the stock market over the two-decade time period between January of 2000 and December of 2019. They compared the actual performance of the stock market over that period to what the results would have been if an investor kept their money in the market the entire time except for the ten best days during those twenty years.

The sum of the daily returns for the ten best days during this time was 69% - or an average of a positive 6.9% per day. Removing the gains of those ten days cut the investment returns in half for the two-decade period. Simply missing ten days of investing would have cost you half of your money. Amazing, right? Their conclusion is that everyone must stay invested in the stock market at all times so that you don’t miss the ten best days. All the major firms publish their own research papers making the exact same case.

Many of you are probably already smelling something fishy here. When you step back from what they are saying and look at the argument objectively, the whole thing is pretty ridiculous. It is very easy to uncover the flaws in this argument.

First, why don’t they do the same analysis of the ten worst days for the same time period? Guess what the sum of the daily returns were for the ten worst days during the same period used in the previous analysis? The answer is a minus 68%. The losses for the ten worst days (-68%) exactly offset the gains from the best ten days (+69%). Isn’t it interesting that they don’t mention this in their studies? Are we to believe that no one at any of these firms over the last 50 years has ever thought to compare the ten best days to the ten worst days? Am I the only one to do this or are they just conveniently leaving this out?

Their argument might still work if the ten best days and the ten worst days were in different time periods. If the ten best days were all in the same month, for example, you would definitely want to be fully invested in the market during that month. But on the flip side, if the ten worst days were all in the same month, you would definitely want to avoid investing during that month. What does the data say?

As you probably already guessed, markets are very erratic. Big up days are often followed or preceded by big down days. Markets very rarely move straight up or straight down.

Look at the following chart for the fall of 2008. It so happens that five of the ten best days in the twenty-year time period from the previous analysis occurred in the fall of 2008. The fact that five of the ten best days occurred in the middle of one of the worst market crashes in history already tells you most of what you need to know. The scatter plot below reveals that eight of the worst ten days of this time period also occurred in the fall of 2008. The five dots in the top half of the chart (positive returns) represent the best days and the eight dots in the bottom half of the chart (negative returns) represent the worst days.

If the ten best days argument leads to the conclusion that we should always stay invested in the market, then what about the fall of 2008? Did it make sense to stay fully invested in the fall of 2008 to reap the benefits of those five terrific days even though the market was collapsing over the same time period? The people who promote the ten best days theory don’t want you to see this chart.

Clearly, the ten best days theory is a foolish argument. It only makes sense if they are telling people not to day-trade the market. Nobody day-trades the market. Most people know that day trading is dumb. Ignore the ten best days argument. In fact, avoid working with anyone that makes this silly argument.

Happy Investing,

Phil

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