This new paper from Mebane Faber of Cambria Investment Management takes on one of the myths of buy and hold investing: That if you’re not always in the market, you’ll miss the really good days that make up most of your gains.Well it turns out that the really good days — just like the really bad days — happen when stocks are are in a tailspin (just like we’ve seen over the last two weeks!).
Here’s the abstract:
“We examine market outliers in financial markets. How much effect do these outliers have on long term performance? Can the investor prepare for these anomalies, or are they truly ‘black swans’ that cannot be managed? In this issue we examine numerous global financial markets on daily and monthly time frames. We find that these rare outliers have a massive impact on returns. However, these outliers tend to cluster and the majority of both good and bad outliers occur once markets have already begun declining. We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, demonstrating that a significant majority of the 10 best days and 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies, and conclude that market timing and risk management is indeed possible, and beneficial to the investor.”