Further, it is a wide known fact that most investors fail to follow the basic idea of buy low and sell high. It seems that most panic and sell when the market is low, and then buy when the market is high. Why would they do this? The most logical conclusion I have heard is that they have fallen victim to timing the market. They feel comfortable buying when the stock is doing well, but not comfortable with their position when the stock price is struggling. This creates a natural phenomenon in which investors trying to beat the market end up losing.. bad.

To conclude, I would agree that the stats can be misleading, but I would not call them meaningless. I would compare them to analogies used to demonstrate points. Using them should fall under the same category as saying you can buy EVERY graduating high school student in the country a brand new Porsche for the next 4 years 14 times over to demonstrate how large our debt is. No one would do that, but yet it is still valid.

As someone who has worked with the public I know first hand that the majority of people respond better to stories that they can visualize. In this manner these stats give people a tool to better inform people of SMART investing strategy in a way that they can easily understand and embrace.

However, while I may agree with your conclusion, I don’t necessarily agree with your method of arriving there. Like you, I think that the “10 best days” argument is a farce. I agree, that it would take the single most unlucky investor in the world to only miss those 10 days and it’s statistically unlikely to happen. But on the other hand, there is plenty of evidence to support Nickel’s claim that the best days most often occur during “bad” periods. Thus missing those days are not purely “random chance”. An investor IS statistically more likely to miss an up day as compared to other randomly chosen days. There is ample evidence to show that the average investor tends to bail out of the market at the tail end of a recession (where a major “up” day is statistically more likely to occur).

I’ll also point out that the Financial Planning Association tackled your argument in one of their past publications. In short, they agreed (like I do) that it was unfair to only look at the 10 best days. In turn, they looked at both the best and the worst days. They discovered that almost all “best” days occurred within 90 days of a “worst” day and that 50% of the time they were no more than 12 days apart. The take away lesson was that a market timer is likely to miss both best and worst, if they miss any at all.

The FPA’s final conclusions: 1) missing the best days was devastating to a portfolio, but unlikely to happen. 2) missing the worst days was amazingly beneficial but equally unlikely. 3) missing both the best and the worst days resulted in performance almost identical to a buy and hold strategy EXCEPT the buy and hold required considerable less time, effort, research, and anxiety. Plus the timing strategy would entail transaction costs and (potentially) taxes that would result in a lower NET portfolio value.

And I’d like to add that just because Nickel can’t (or hasn’t) offered a better solution doesn’t lend any additional credibility to your solution. Suppose, for example, that you made the claim that aspirin could cure all cancers. I don’t have to provide an alternative cure of my own to prove that your claim is false. There’s plenty of evidence that aspirin doesn’t cure cancer. If Nickel’s only contribution is to make people think more critically about your proposal, then I say it is still a worthwhile post and shouldn’t be dismissed simply because it doesn’t offer an alternative solution. I interpreted your response to be “if you can’t provide a better method, keep your mouth shut”. If I misinterpreted, I apologize in advance.

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.

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.

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.

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 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.