Comments on: Out of the Market and Meaningless Stats http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html like a friend telling you about money ... Thu, 19 Nov 2009 19:44:17 -0600 http://wordpress.org/?v=2.8 hourly 1 By: TFB http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-220 TFB Mon, 27 Aug 2007 15:02:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-220 Nickel,<br/><br/>Thank you for your comments. If you think my calculation was a huge oversimplification, what do <i>you</i> think the realistic odds are for missing the 10 best days in 10 years and 25 years and how do you prove it? <br/><br/>Please read my follow-up post: <a HREF="http://thefinancebuff.com/2007/08/more-on-missing-10-best-days.html" REL="nofollow"> More On Missing the 10 Best Days</a>. Nickel,

Thank you for your comments. If you think my calculation was a huge oversimplification, what do you think the realistic odds are for missing the 10 best days in 10 years and 25 years and how do you prove it?

Please read my follow-up post: More On Missing the 10 Best Days.

]]> By: fivecentnickel.com http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-217 fivecentnickel.com Fri, 24 Aug 2007 12:26:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-217 An additional point in response to anonymous... The deck is actually strongly stacked against missing the low days and being in on the high days. As I've already pointed out, the highest days typically come in the wake of (relatively) unforeseen negative events. The fraction of investors that sold out just before Black Monday is very small compared to the fraction that bailed amidst huge losses. Many were then out of the market for the biggest bounce. You can't look at this in terms of pure random probability. You have to consider the correlation between down markets and up days, as well as the human tendency to bail during the former, missing out on the latter. An additional point in response to anonymous… The deck is actually strongly stacked against missing the low days and being in on the high days. As I've already pointed out, the highest days typically come in the wake of (relatively) unforeseen negative events. The fraction of investors that sold out just before Black Monday is very small compared to the fraction that bailed amidst huge losses. Many were then out of the market for the biggest bounce. You can't look at this in terms of pure random probability. You have to consider the correlation between down markets and up days, as well as the human tendency to bail during the former, missing out on the latter.

]]> By: fivecentnickel.com http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-216 fivecentnickel.com Fri, 24 Aug 2007 12:15:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-216 While you're correct that this overstates the problem in that people won't miss just the 10 best days of the market, you're forgetting that the biggest days often come in the earliest stages of a recovery.<br/><br/>For example, looking over the past 25 years, three of the 10 biggest days came in the week and a half following Black Monday, and two more of them occur in close succession at the very tail end of the dot bomb debacle. Thus, these days are concentrated into periods when people are especially likely to have bailed on the market and not gotten back in.<br/><br/>Consider the scenario in which sometimes gets smacked on Black Monday, jumps out of the market to lick their wounds, and then immediately misses gains of 9.3%, 5.3% and 4.9%. They've now locked in a huge loss that they had little chance of avoiding in the first place, and they also missed out on a huge recovery.<br/><br/>Calculating the probability that people will randomly miss the ten best days is a *huge* oversimplification, and it casts doubt on your entire argument. While you're correct that this overstates the problem in that people won't miss just the 10 best days of the market, you're forgetting that the biggest days often come in the earliest stages of a recovery.

For example, looking over the past 25 years, three of the 10 biggest days came in the week and a half following Black Monday, and two more of them occur in close succession at the very tail end of the dot bomb debacle. Thus, these days are concentrated into periods when people are especially likely to have bailed on the market and not gotten back in.

Consider the scenario in which sometimes gets smacked on Black Monday, jumps out of the market to lick their wounds, and then immediately misses gains of 9.3%, 5.3% and 4.9%. They've now locked in a huge loss that they had little chance of avoiding in the first place, and they also missed out on a huge recovery.

Calculating the probability that people will randomly miss the ten best days is a *huge* oversimplification, and it casts doubt on your entire argument.

]]> By: TFB http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-200 TFB Thu, 26 Jul 2007 18:09:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-200 Ted asked:<br/><br/><i>Say they missed last Thursday. Will they ever get the opportunity to make that back? Maybe the more important question is when will that occur?</i><br/><br/>Now we know the answer is yes and time for the wait is two weeks. Right now the Dow is trading at 13,472.84 down 312.23. That is below the 13,577.87 close on July 11, before the 284 points jump on July 12.<br/><br/>All these just show that the market is volatile. Some days are up. Don't get too excited. Some days are down. Don't get too pessimistic. Ignore the noise. Ted asked:

Say they missed last Thursday. Will they ever get the opportunity to make that back? Maybe the more important question is when will that occur?

Now we know the answer is yes and time for the wait is two weeks. Right now the Dow is trading at 13,472.84 down 312.23. That is below the 13,577.87 close on July 11, before the 284 points jump on July 12.

All these just show that the market is volatile. Some days are up. Don't get too excited. Some days are down. Don't get too pessimistic. Ignore the noise.

]]> By: AGivant http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-195 AGivant Tue, 24 Jul 2007 19:28:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-195 I never seen any statistics what happens if you missed 10/40 worst days on market. I never seen any statistics what happens if you missed 10/40 worst days on market.

]]> By: TFB http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-194 TFB Mon, 23 Jul 2007 19:58:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-194 I'm sure the return would be phenomenal if someone is able to avoid the 10 worst days in 10 years. But the chance for that is also one in 2.8 billion billion billion. Don't even think about it. Nobody can do it.<br/><br/>Because the stock market goes up over time, being out of the market usually means missing some average "up" days. I don't think trying to predict the "down" days and jumping out is a useful strategy. If you have to be out because of an account transfer, I wouldn't worry about it. But I also wouldn't get out of the market intentionally. I'm sure the return would be phenomenal if someone is able to avoid the 10 worst days in 10 years. But the chance for that is also one in 2.8 billion billion billion. Don't even think about it. Nobody can do it.

Because the stock market goes up over time, being out of the market usually means missing some average "up" days. I don't think trying to predict the "down" days and jumping out is a useful strategy. If you have to be out because of an account transfer, I wouldn't worry about it. But I also wouldn't get out of the market intentionally.

]]> By: Anonymous http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-193 Anonymous Mon, 23 Jul 2007 18:42:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-193 Another slightly related query is "what is the return if someone avoided the 10 (40) worst days?" While the odds of that happening are similarly impossible, the tried and true scaremongering stats of the brokerage houses avoid answering the question about how market timing can reduce risks in some circumstances. <br/><br/>I tend to look at it on somewhat of a 1:1 basis. If I miss the best day of performance but avoid the worst day of performance, will that make me happy? Stated differently, would I give up the biggest "up" day in return for avoiding the biggest "down" day? Absofreakinglutely. Another slightly related query is "what is the return if someone avoided the 10 (40) worst days?" While the odds of that happening are similarly impossible, the tried and true scaremongering stats of the brokerage houses avoid answering the question about how market timing can reduce risks in some circumstances.

I tend to look at it on somewhat of a 1:1 basis. If I miss the best day of performance but avoid the worst day of performance, will that make me happy? Stated differently, would I give up the biggest "up" day in return for avoiding the biggest "down" day? Absofreakinglutely.

]]> By: Ted Valentine http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html/comment-page-1#comment-191 Ted Valentine Mon, 16 Jul 2007 15:32:00 +0000 http://blog.thefinancebuff.com/?p=137#comment-191 I think these statistics are useful to a point, and that point is don't hold your money if you plan to invest it in the market.<br/><br/>What if someone was holding cash in a MM waiting for the market, at or near all time highs, to go down before investing in a Roth IRA?<br/><br/>Say they missed last Thursday. Will they ever get the opportunity to make that back? Maybe the more important question is when will that occur? I think these statistics are useful to a point, and that point is don't hold your money if you plan to invest it in the market.

What if someone was holding cash in a MM waiting for the market, at or near all time highs, to go down before investing in a Roth IRA?

Say they missed last Thursday. Will they ever get the opportunity to make that back? Maybe the more important question is when will that occur?

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